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Blunting Volatility in the Markets, Using Volatility In Your Portfolio

Your Money: Coping with stock market volatility (my latest for the Inquirer)

Investors realize the stock market is more volatile these days, so we went looking for the reasons by checking in with some local money managers. We also asked how they invest during the traditionally action-packed autumn months.

Greg Levinson and several alums of the King of Prussia-based BNP Cooper Neff Inc. run the Schooner Growth and Income Fund (symbol: SCNAX) for retail investors. They trade about 75 large-cap stocks, and also trade heavily in options – puts and calls – around those holdings, based on whether they believe the stocks are going to go up or down.

Trading options is not for everyone. Usually, retail investors have to ask for special permission from their brokerage firm to trade options because they are risky. The Options Industry Council offers classes and education on how to trade options, and they can sometimes be a cheaper way to invest than the underlying stocks.

These days, the stock market is much more volatile than it used to be – as measured by one barometer called the Volatility Index (VIX). In 1995, Levinson recalls, the VIX normally registered around 9 or 10. The VIX, an index calculated from the prices investors are willing to pay for options tied to the Standard & Poor’s 500 Index, tends to rise as stocks fall. Thus it is commonly referred to as the “fear gauge.” Options allow investors to bet on the direction a stock or index fund might move.

Ever since the financial crisis of 2007-2008, the VIX has traded in a much higher range, in the teens. Just last week, it reached 17.98 on worries that European bank leaders would fail to reach agreement on a bailout of some of the eurozone nations.

“From 2007 to 2009, the market witnessed a drawdown of 60 percent, and then from March 2009 until today has earned a [nearly complete] rebound,” Levinson says. With the speed of information, markets move faster, falling and rebounding 15 percent at least three times in the last few years.

The continual ebb and flow in confidence regarding the euro nations’ abilities to confront their crisis has been one driver of the markets. In other words, expect more roller coasters.

For the first time in months, Levinson says, he and his team have been buying protection on their portfolio, in the form of put options on the S&P 500 Index. Right now, he says, they are fairly cheap. They won’t stay that way for long, he believes.

Levinson, a Wilkes-Barre native, understands volatility because he and his partners have backgrounds in this field. But they wanted to make the strategy available to the retail crowd through a mutual fund they started in 2008. Levinson had worked as a head trader at BNP Cooper Neff, where he led the U.S. convertibles investment team.

Levinson compares the coming autumn period to a full-tilt financial crisis.

“Politicians in this country can’t ‘kick the can’ much longer,” argues Levinson, regarding dealing with the U.S. debt and deficit budgeting. “Yes, longer-term corporate earnings are great. But there are macro headwinds, and there is going to be a higher level of uncertainty for large-cap stocks [over the next one to three months].”

In particular, the Schooner Fund is staying away from Apple (symbol: APPL). “It is a very crowded trade, and the stock is now a huge part of the S&P 500 Index,” Levinson says. “It is the broadest top holding in every hedge fund and the average growth-style mutual fund.”

There are some funds with Apple as their biggest holding – the Matthew 25 Fund (symbol: MXXVX), for example. The growth-style fund had more than 17 percent of its holdings in Apple, according to its semiannual report on June 30.

Schooner Fund sold its Apple shares in early 2012, after holding the maker of iPhones and iPads on and off since 2008.

“They are no longer the only company with cool toys,” Levinson says of Apple, singling out competitor Samsung.

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