Sorry in advance for the length of this but this is my big picture view of what you have asked about.
There are different approaches to protecting profits, reducing your losses, or profiting in a bear market.
Buy & hold types recommend diversification (sector, asset class, geographic, etc.). Equity diversification spreads losses across various sectors, hoping that some don't lose as much as others. With equity and geographic diversification, you will lose in a deep recession. You'll take the beating as you ride it out.
For the period of 1/01/08 to the end of the GFC on 3/09/09, the SPY lost 52%. The best performing SPDR sector was Consumer Staples, down 'only' 31%. Those losing more than 50% included Consumer Discretionary, Energy, Industrials, Materials, O&G Exploration, and Technology, with the winning entry being Financials, down 77%. Note that a drop of 50% requires a 100% recovery to break even (ignoring dividends).
Some recommend gold. Sometimes it correlates, sometimes not. It's iffy. For the past three recessions:
In 1990, it lost about 10% of its value.
In 2000, it did nothing.
In 2008 it dropped 30% before recovering and ending up 4% for the year.
Some recommend stop loss orders. That's fine in an orderly correction but in a volatile down market or a crash, you'll have no clue where your fill will be if price gaps through your stop loss price.
You could write covered calls but that only provides limited downside protection unless they are deep ITM. For ATM and OTM CCs, if your stock craters, you won't be able to continue doing so without locking in a loss. Writing deep ITM covered calls provides more protection but why would you? You would have little to no upside profit potential and they would be Unqualified which means that you would not be able to claim long-term gains if assigned and the underlying is called away. Caveat? Don't monkey with covered calls if you don't want to sell the stock.
You could buy protective puts but that has several issues. At the current level of implied volatility, ATM portfolio protection with SPY puts costs about 8 pct a year. Puts on individual stocks usually cost more. That's a lot of portfolio drag to overcome if the stock or stock market stagnates or only moves up modestly. You can reduce put protection cost if you use OTM puts but that adds a 'deductible' to the equation (loss from current price down to the put's strike price). If you buy protective puts and the market moves up, additional gains will not be protected.
If you are willing to make the trade off of giving away much of the upside potential gain, you can reduce/eliminate the cost of protective puts by collaring your long stock. For every 100 shares that you own, sell an out-of-the-money (OTM) call and use the proceeds to buy an OTM put. This defines a floor beneath which you cannot lose as well as a ceiling beyond which you will not profit. You can do it on individual stocks or globally with liquid SPY options.
Collars can be structured for no cost. If you want to skew the risk graph so that you have more upside potential than downside risk, the call will be further OTM (or the put closer to the money) and the collar will have a net cost. Skewing the collar in the opposite manner (the put is more OTM than the call is OTM) will result in a net credit but potential loss will be greater than the potential profit.
Pending dividends affect option premium, inflating put premium and deflating call premium. The larger the dividend, the more expensive a collar becomes.
If you do 1-3 month long stock collars and the stock appreciates toward the short call strike, With some cooperation from the underlying, you may be able to roll the collar up and/or out, protecting some of your additional capital gain. Wash, rinse, repeat. Caveat? Don't monkey with collars if you don't want to sell the stock.
To offset losses or profit during a recession, you need to own negative correlation positions:
1) But puts
2) Buy inverse ETFs
3) Short stocks, ETFs, futures
4) Run a long/short portfolio
The average Joe can take advantage of a bear market (not crash) and profit from it. Note that a crash and a bear market are different beasts. 1929 and 1987 were crashes. Unless you had some form of negative correlation protection in place prior to them, you paid the piper. Bear markets like 2000 and 2008 took 18 months to unfold and they offered lots of time to react and adjust if you weren't oblivious or afraid of being wrong.
Transitioning to cash or quality debt is something that any investor can achieve. Managing the downside requires more experience and effort. As the market drops, transition to more cash or fixed income and eventually add a small portion of negatively correlated positions. Let your portfolio’s declining value dictate the transition from long to short (and vice versa). React, don't predict.
