An Arsenal for the Defensive Investor

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Considering that roughly half of all options are never exercised, it behooves investors to be on the selling side, says Levas, founder and chief investment officer of Olympian Capital Management in Fort Lauderdale. "People who make money in options are the sellers," he says. "They're taking money in, and if the stock is called away, they've still made money on it." Investors can write covered calls by setting them up through brokers or financial advisers, says Levas.

7. Short-market funds

Another option is to go short. An investor with long positions in equities can always purchase short funds—which bet that the overall market will decline. Levas recommends investors take a look at ProShares' variety of exchange-traded funds like the Short S&P 500, which performs inversely to the S&P 500. Mutual funds that short-sell the market, such as the $1.2 billion Prudent Bear Fund (BEARX), can also offset long positions and shrink risk.

8. Consumer staples and dividend-paying stocks

Investors should remember that, over periods of five years or more, equities are still relatively safe. If you look to five-year periods going back to 1926, 90% of the time the stock market hasn't lost money, says Palisades' Bergman. "If you can mentally withstand the volatility over the next five years," he says, "stick with the stock market." The consumer staples sector is often seen as a good recessionary refuge, because "no matter what goes on we still eat, drink, and hopefully bathe," says Bernstein. "Consumer staples tend to hold onto money better," says Tim Crowe, managing director and chief executive of Anchor Point Capital in Coral Gables, Fla. U.S. portfolio managers still say the sector is underweighted, according to a recent fund managers' survey from Merrill Lynch.

Other relatively safe stocks in a recessionary environment are those of companies with high dividend yields. While a juicy dividend doesn't guarantee healthy financials (see Wachovia's 12.9% yield), high-dividend companies are generally less volatile than their growth-company counterparts. State Street Global Advisors offers an ETF (SDY) that tracks the Standard & Poor's index of 60 companies that have increased their cash dividend in each of the last 25 years. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP).)

9. Corporate bonds

More audacious investors still seeking a degree of safety can venture into corporate bonds, even in the financial sector, according to Tom Hayden, vice-president and director of investments at American Reserve Group in Dallas. Since record writedowns by big financial firms and plummeting stock prices have spooked the overall industry, higher-quality banks have been forced to pay more to borrow money, he says. Which means that there are deals to be had. Banks including Bank of America (BAC) and Wells Fargo (WFC) are too well-capitalized and "high quality" for their debt not to be "money-good," he argues. A 2015 Bank of America bond with an A+ rating from Fitch, a AA- from S&P, and an Aa3 from Moody's, yields 7.9% today. "Compared to owning equity in the company it's defensive," says Hayden. "But it's certainly a contrarian play."

10. Preferred Stock

Investors who want a stable income stream should look into buying preferred stock from corporations with good credit quality. Of course, "good credit quality" isn't what it used to be, so investors need to pay special attention to things like a company's cash reserves, its bond ratings, and its interest coverage ratio—its earnings before interest and taxes (EBIT) divided by its interest expense over the last 12 months.

High-grade preferred stock in solid companies offers two defensive advantages, says Olympian's Levas. First, preferred stock holders stand in front of common stock counterparts if a company liquidates or goes bankrupt. Second, "you're also getting a steady stream of income all the time," says Levas. "So for somebody concerned about current income that's a great option." Dividends are usually paid monthly or quarterly. Levas recommends preferred stock from insurance holding company Markel (MKV), since it yields 7.5% and the price has fluctuated very little despite turbulent financial markets. The company carries a BBB bond rating from S&P, and its EBIT was a healthy nine times its interest expense over the last four quarters.

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McRoskey is an intern at BusinessWeek.com.