In a recent article ("Hedging 10 'Relatively Safe' Stocks"), we looked at the 10 stocks with high "Relative Safety" scores according to VectorVest. In this article, we'll look at the ones with high "Relative Timing" scores. Relative Timing is a measure of technical strength that VectorVest calculates based on its analysis of:
the direction, magnitude, and dynamics of a stock's price movements over one day, one week, one quarter and one year time periods..
VectorVest ranks stocks in terms of Relative Timing in the same way it ranks them in terms of Relative Safety: on a scale from 0 to 2, with 2 being the highest (best) possible score. The stocks listed in the table below had Relative Timing scores ranging from 1.38 to 1.69 on Monday. I also looked at the hedging costs for these stocks using optimal puts, and found an interesting dichotomy: five of them were two expensive to hedge against greater-than-20% declines over the next several months, but the other five stocks had lower hedging costs than the high "Relative Safety" stocks we looked at in the previous article.
You can see those costs in the table below. First, a reminder about what optimal puts are, and why I've used 20% as a decline threshold; then, a screen capture shows the current optimal puts to hedge one of the stocks listed below, Temple-Inland, Inc. (TIN).
About Optimal Puts
Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.
In this context, "threshold" refers to the maximum decline you are willing to risk in the value of your position in a security. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). I have used 20% thresholds for each of the securities below. Essentially, 20% is a large enough threshold that it reduces the cost of hedging, but not so large that it precludes a recovery.
The Optimal Puts For TIN
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of TIN against a greater-than-20% drop between now and May 18, 2012. One note about these optimal put options and their cost: to be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask.
click to enlarge
Why There Were no Optimal Contracts for half of these stocks
In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with half of the stocks on this list. As of Monday, the cost of protecting them against a greater-than-20% declines over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for them.
Hedging Costs as of Monday
The data in the table below are as of Monday. The stocks are listed in order of Relative Timing, ranging from an RT of 1.69 for MMI to an RT of 1.38 for STAA.
Cost of Protection (as % of position value)
Motorola Mobility Holdings, Inc.
|(GLBL)||Global Industries, Ltd.||3.16%*|
Pharma Product Development
|(VRUS)||Pharmasset, Inc.||No Optimal Contracts|
|(HRBN)||Harbin Electric, Inc.||No Optimal Contracts|
|(TNS)||TNS, Inc.||No Optimal Contracts|
|(MDCO)||The Medicines Company||No Optimal Contracts|
|(STAA)||STAAR Surgical Company||No Optimal Contracts|
*Based on optimal puts expiring in March, 2012
**Based on optimal puts expiring in April 2012
***Based on optimal puts expiring in May 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.