Against a shaky backdrop, rising volatility here are four ways to protect your portfolio heading into earnings season.

A few weeks back I pointed out some warning signs suggesting the market might be vulnerable to a decline. Those type of readings and gauges can persist for extended periods and therefore offer little by way of timely or actionable trading signals.

Now with earnings seasons upon us comes the real acid test; will companies post sufficient bottom line growth to justify the recent multiple expansion being awarded the market? I think given the strength in the dollar, the general global slowdown outside the U.S. and crash in oil which will impact nearly 25% of the S&P 500 earnings will disappoint and forecasts will be revised lower?

We are now getting more specific price action and news that could lead to a significant sell off:

Increased volatility: The past few days stock market has been experiencing wide price swings with alternating up and down days and expanding volatility. On Tuesday the market registered a large intraday reversal of over 3% trading range. This type of action usually precedes a turn in market trend.   Indeed, the VVIX or “volatility of the volatility index has been trending sharply higher. The VVIX typically ranges between 60-100. In the past few days, the 21-day average (approximately 1 month) of the VVIX reached a level of 110. Since the inception of the VVIX in 2007, this is just the 5th time its 21-day moving average has gotten that high. The other 4 occurred during times of legitimate turmoil.

Oil continues to collapse. While lower gas helps the consumer it’s hard to imagine that a 50% decline in a matter of months in arguably the world’s most important commodity could occur without negative ripples and market dislocations.  This includes the sharp drop in capital expenditures and loss of high paying jobs as oil companies slash spending and close wells. There will be a sharp reduction in earnings across the sector which will directly impact the multiple of the S&P 500 Index. The cut in energy earnings is already weighing on the high yield bond market. There is also potential geo-political concerns.

Plunge in Copper: The metal that’s often referred to as Dr. Copper because it tends to speak to the health of the global manufacturing economy has plunged some 22% to a 4 year low. That, along with declines in other commodity suggests lack of demand and the negative impact of a stronger dollar I discussed.

Weak Housing Recovery: I am long term bullish on the housing market. In fact, I made Lennar (LEN) my top pick for 2015. It appeared the homebuilders were on track for a sustainable recovery which would underpin the U.S. economy. News that the FHA would reduce the premiums on mortgage insurance helped push the iShares Home Construction Fund (ITB) a new 52-week high and investors were piling into the home builders as analysts turned bullish.

But on Tuesday KB Homes (KBH) issued a warning on margins and that sent the entire sector into a sharp reversal.

This is going to throw a huge question market into what is the cornerstone to a robust U.S. economic recovery. Investors and home buyers alike will now take a wait and see attitude before committing fresh money.

Three Ways to Protect

Now I don’t want to be all doom and gloom nor am I suggesting you rush out and sell you’re your stock holdings. But it is against this backdrop I’d like you to consider your options for establishing downside portfolio protection. Let’s look at three ways to use options to protect, or even benefit, from a 5% decline in the SPDR Trust (SPY) using put options. With all examples I’m using the February 21^st expiration date.

Outright Put Purchase

The simplest and most straightforward way to establish downside protection is through the outright purchase of puts. With the SPY trading around $203 one can buy the $200 strike puts with a February 21^st expiration for $3.50 a contract.

The advantages: Benefit from an increase in implied volatility. It provides unlimited profit potential or downside protection.   You can take close it for a large profit at any point prior to expiration.

The Disadvantages: It is negatively impacted by a time decay and decline in implied volatility.

Basic Vertical Spread

A vertical put spread involves simultaneously buying puts and selling an equal number with a lower strike price with the same expiration date. For example; Buy Feb. $200 put and sell Feb. 190 put for a $1.50 net debit.

The advantages: A spread greatly reduces the cost. Mitigates the impact of time decay and implied volatility.

The Disadvantages: Profits /protection is limited to the width of the spread. In the example above the maximum gain is $8.50 and would be realized if SPY is below $190 at expiration.

Ratio Spread

A ratio spread involves buying a higher strike put and selling a greater number of lower, further out-of-the-money puts. For example; buy 1 Feb. $200 put and sell 2 Feb. for even money.

The advantages: Ratio spreads can be established for little or no cost; sometimes even a credit in times of high implied volatility. This means there is no loss if SPY is above $200 at expiration.   The position benefits from both time decay and a decline in implied volatility.

The Disadvantages: Because you are selling more put option contracts than you are purchasing it has a “naked” component. Meaning you exposed to unlimited losses if SPY shares decline below the breakeven point. In the example above the breakeven is $180 or a 10% decline in the SPY.

Butterfly Spread

A butterfly spread involves three strike prices in which you buy the highest and lowest and sell twice as many of the middle strike giving it a 1x2x1 construction. For example: buy 1 Feb $200 put, sell 2 Feb $190 puts, buy 1 Feb $180 put for a $0.70 net debit.

The advantages: Butterfly, which are two offsetting spreads, greatly reduce the cost and risk. They neutralize the impact of time decay and changes in implied volatility. It offers very attractive risk/reward. In this example for a $0.70 risk the maximum profit could be $9.30 or over 900%.

The Disadvantages: The main drawback is the maximum profit can only be realized if SPY is exactly at the middle strike, $190 in this case, at the expiration date. One can only realize very minimal profits prior to the expiration.

These are four examples of how put option strategies can be used to both protect and profit from market declines. The approach you use will depend on your market outlook and risk tolerance.