Secret Santa’s Inflation Hedges For 2016

Merry Christmas!

I hope you get everything you want this holiday season and, most importantly, I hope you have time to spend with your family.  I love waiting for my kids to wake up on Christmas morning to come out of their rooms so I can videotape (gosh I’m old, there’s no tape anymore) them in those first moments of Christmas morning – how can I not be of good cheer anticipating that?

I have something I can give you for the holidays as well.  Not peace on Earth but perhaps peace of mind heading into the New Year – a way to help insure some future prosperity with a few inflation-fighting stock picks that can brighten up your portfolio, which also can be used to help balance the budget against unexpected cost increases.  

This isn’t an options seminar or one about risk or leverage – these are just a few practical ideas you can use to hedge against inflation as it may affect your everyday life using basic industry ETFs and some simple hedging strategies to give you an opportunity to stay ahead of the markets if they keep going higher. 

We haven’t felt the need for inflation hedges since 2011 as the Fed has kept us in a somewhat DEflationary cycle but our 2011 hedges were good for 300-600% returns and we’re simply going to repeat the same, simple concepts here to set up good, rational hedges against inflation to insure a financially healthy and happy 2015:

Idea #1 – Hedging for Home Price Inflation

Let’s say you have $40,000 put aside for a deposit on a home but you’re not sure it’s the right time to buy.  On the other hand, let’s say you are worried that home prices will take off again (I doubt this but you never know).  XHB is the homebuilder’s ETF, currently at $34.49 and they bottomed out at $31.62 in August and still well off the highs for the year of $39 right before the flash crash.  

You can sell 20 contracts of the XHB 2018 $28 puts for $2.25 each ($4,500) and that obligates you to buy 2,000 shares of XHB at $28 (16% off the current price) and you can use that money to buy 20 2017 $28/33 bull call spreads for $3.50 ($7,000) and that’s net $2,500 out of pocket and you have 20 $5 contracts that pay back $10,000 if XHB simply stays flat through 2016.  These bull call spreads, however, do not pay off early – the ETF needs to be above $33 at Jan 2017 options expiration day (the 20th).  

So you are putting up $2,500 in cash and the margin requirement on the sale will be roughly $5,500 in an ordinary margin account.  What have we accomplished?  Well, if XHB goes up, your $2,500 becomes $10,000, adding $7,500 (300% gain on cash) to your $40,000 deposit, that should keep you up with up to a 20% jump in home prices but, if they go up that fast, getting a deposit will be the least of your problems!