The stock market doesn’t come with a safety net. Prices rise and fall, headlines spook the market, and sometimes, even solid portfolios take a hit.

So, if you’ve ever asked: “Can I insure my stocks?”

The short answer is: Yes, but not in the traditional way you’d insure your car or home. But the good news is you can hedge your bets and protect your investments from major market losses.

Here’s a step-by-step breakdown of how to reduce risk, preserve capital, and sleep better at night, even during a market crash.

Step 1: Understand What “Insuring” Stocks Actually Means

You can’t buy a stock insurance policy like you would for health or auto, but you can build in protection.

This comes down to a mix of strategies, like diversification, stock options (especially puts), index and ETF options, and alternative assets like bonds, cash, and even real estate.

These tools will help you cushion the blow if the market nosedives.

Step 2: Diversification is Your Portfolio’s Seatbelt

Start with Solid Diversification. Instead of betting all your chips on one stock or sector, spread your money across different assets.

For instance, you can diversify your holdings with stocks across multiple industries (tech, health, consumer goods, etc.), broad index funds like the S&P 500 or Dow Jones, bonds (U.S. Treasury bonds are especially stable), commodities (like gold or oil), and international stocks or ETFs.

Think of diversification as creating a balanced meal. If one ingredient goes bad (say, tech stocks crash), the rest of the meal still holds up.

Step 3: Use Stock Options to Hedge Your Bets

This is where things get powerful because options give you more control over potential losses.

Stock options are contracts that let you buy or sell a stock at a set price by a certain date.

Here’s how to use them:

A Call Option, which is the right to buy a stock. You use this when you expect the stock price to rise.
A Put Option, the right to sell a stock, is best when you expect the stock price to drop.

To protect your stock investment, focus on put options.

Say you own Apple stock at $180 and buy a put option with a strike price of $175. If Apple crashes to $150, your put lets you still sell at $175, which limits your loss.

Step 4: Explore Index and ETF Options

Don’t want to manage puts on individual stocks? You can also hedge with index or ETF options, which track a basket of stocks.

Index Options like S&P 500 puts and ETF Options such as SPY (S&P 500 ETF), QQQ (tech stocks), or XLE (energy) are some notable mentions.

These are ideal if you own index funds or sector ETFs, you want broader protection for your portfolio, and you’re nervous about a market-wide crash.

During a bear market, index or ETF put options tend to spike in value, which offsets your losses elsewhere.

Step 5: Hedge Against Market Volatility (VIX Options)

Are you feeling jittery about unpredictable swings? VIX options are tied to the “fear index” (VIX), which measures market volatility.

These don’t follow stock prices directly but can spike when the market drops, acting as another layer of insurance.

VIX options is basically betting on chaos. When things get messy, they pay off.

Step 6: Keep a Cash Cushion and Add Treasuries

Let’s say the market crashes tomorrow. Do you have a cushion?

Keeping a portion of your portfolio in cash is smart because it gives you flexibility to buy discounted assets, protection from falling prices, and most importantly, peace of mind.

Also, don’t overlook U.S. Treasury Bonds. They’re backed by the U.S. government, low-risk, and a solid way to preserve capital during downturns.

Step 7: Understand the Capital Loss Deduction

Even with all the right moves, losses can happen. But there’s a tax silver lining.

You can deduct up to $3,000 in capital losses each year against your regular income. Anything more than that, and you can carry the loss forward to future years.

So while losses sting, they can soften your tax bill.