How To Hedge Against A Government Shutdown

Rising tensions in Washington have trigged anxiety in the stock market. Investors are climbing a wall of worry. But those who want to protect their portfolio in the event of a government shutdown or contentious debt-ceiling debate might consider hedging with put options.

In a note published today, Goldman Sachs analysts Robert Boroujerdi, John Marshall, Michael Chanin and Krag Gregory say not much gfear has been priced into put options for either the S&P 500 or stocks with higher exposure to government spending. As a result, they suggest one of the following hedging strategies:

Buy the optimal SPX puts to hedge a 5% down-move: Buying a November 1650 put on the S&P 500 index costs 1.2% and Goldman estimates a 2.7-to-1 payout if the index falls 5% by mid-October. Beware of government exposure: The firm tracks a basket of more than 100 companies that derive at least 20% of their revenue from the government. Though the list includes defense contractors and tech giant, more than half of the names are health-care companies, including Amgen (AMGN), HCA (HCA) and UnitedHealth Group (UNH). Buy puts on stocks with high government exposure: November puts on government-exposed names cost 2.4% on average (5% out of the money strike).