Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Investment and Options Strategist
In this article, we will explore the concept of diversifying a tech-heavy portfolio by incorporating defensive sector ETFs using long-term options. This strategy can help manage risk in the face of market volatility, offering a more balanced portfolio without abandoning the potential growth offered by technology stocks.
Big tech stocks have been dominant performers, but they are also vulnerable to volatility—especially during uncertain economic periods. The macroeconomic environment is unpredictable, with factors like rising interest rates, inflation, and geopolitical risks all contributing to a volatile market. For tech-heavy portfolios, this poses significant downside risks.
In this case study, we will look at a tech-focused portfolio and explore how we can diversify it by adding defensive sectors, using long-term options (LEAPS). These options provide a cost-effective way to gain exposure to defensive sectors while committing a relatively small portion of capital.
Important disclaimer: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Let’s assume you have the following tech-heavy portfolio:
Total portfolio value:
Total portfolio value: $33,719 + $107,058 = $140,778
This portfolio is heavily weighted towards U.S. tech stocks like Microsoft (MSFT), Alphabet (GOOGL), and NVIDIA (NVDA). While these stocks provide great growth potential, they are vulnerable to economic headwinds. We aim to diversify 25% of this portfolio into defensive sectors to better balance risk and reward.
In this article, we’ve chosen to diversify 25% of the portfolio into defensive sectors. However, it’s important to emphasize that this number was selected purely for the purpose of demonstrating the strategy and does not represent an ideal or recommended percentage for all investors.
How much you diversify depends on several factors:
In this example, 25% was chosen as a random number to showcase the impact of diversification. It’s not a fixed rule or a recommendation, but a starting point to illustrate how using options can help spread risk. The actual percentage you choose should be based on your personal financial goals, market outlook, and risk profile.
While big tech stocks provide growth, they are also sensitive to macroeconomic conditions, particularly interest rates and market volatility. In recent years, rising interest rates have hurt tech stocks because higher borrowing costs affect future earnings. At the same time, inflation and geopolitical instability increase uncertainty.
To reduce concentration risk, we will add exposure to defensive sectors like utilities, real estate, treasuries, and gold. These sectors typically perform better during market downturns, providing a hedge against economic slowdowns and high volatility.
We will allocate 25% of the total portfolio ($35,195) into four defensive ETFs using long-term options (LEAPS). These ETFs have been chosen for their historically strong performance during economic uncertainty:
For European clients, it’s important to note that many of these U.S.-listed ETFs, such as XLU, XLRE, TLT, and GLD, are not directly tradeable due to MiFID II regulations. MiFID II restricts access to ETFs that do not comply with European investor protection standards, meaning these products are often not available for direct purchase by retail investors in Europe.
However, a workaround is trading options on these ETFs. MiFID II does not prohibit European retail investors from trading options on U.S.-listed ETFs, allowing you to gain exposure to these sectors through options contracts while still adhering to regulatory restrictions.
In this case, by using long-term options (LEAPS) on these ETFs, European investors can still benefit from price movements in these defensive assets without needing to own the ETFs outright.
This week, the Federal Reserve is expected to cut interest rates for the first time since 2020, which could directly benefit the defensive sectors we’ve chosen:
These sectors provide a counterbalance to the volatility in the tech sector, reducing risk while offering stable returns.
To fund the options purchases, we will sell 25% of each stock in the portfolio. This raises the necessary $35,195 to allocate towards the selected ETFs:
Now that we’ve raised the capital, here’s how we’ll use it to buy long-term options (LEAPS) on the selected ETFs:
The January 2026 expiration date was chosen to give the options plenty of time to maturity. By selecting an expiry more than two years away, we reduce the risk associated with time decay (the gradual loss of an option's value as it approaches expiration). With this longer timeframe, we give the underlying assets room to move in our favor, allowing more flexibility in timing without the pressure of a near-term expiry.
We’ve chosen strike prices for the options that offer a delta close to 0.80. Delta measures how much the option’s price is expected to change for each $1 move in the underlying asset. An 0.80 delta means the option will move approximately $0.80 for every $1 movement in the underlying ETF.
By targeting options with an 0.80 delta and an expiration date in January 2026, this strategy seeks to balance risk and reward effectively. You get the benefit of leverage without excessive risk from time decay or volatility, and the underlying assets have plenty of time to perform as expected.
While LEAPS offer leverage and cost efficiency, they also come with risks:
To manage these risks, it’s important to diversify, monitor positions, and avoid over-leveraging.
After selling 25% of each stock to fund the purchase of LEAPS, here’s your updated portfolio, including both stock holdings and long-term options:
By diversifying the portfolio, we’ve achieved several important objectives that go beyond simply reallocating assets:
Deconcentration of tech holdings:
Increased market exposure through long-term options (LEAPS):
Less volatility and risk management:
It’s important to emphasize that this case study serves as education/inspiration, and the strategy can be adapted to fit different goals and preferences:
This strategy provides a template for reducing concentration risk, improving market exposure, and creating a more balanced, resilient portfolio in uncertain economic conditions. The options are endless, and the key is to tailor the approach to your specific goals and outlook.
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