Hedging 6 Of The Highest-Rated Computer Makers

by: David Pinsen

Apple Ranks Highest As A Hold

As of Friday's close, Apple, Inc. (NASDAQ:AAPL) was the highest-rated company in the industry group VectorVest assigns it to (computer makers), with a VST ranking of 1.32 (on a scale from 0 to 2). Recall that VST (Value, Safety, Timing), VectorVest's master ranking, is comprised of a weighted average of its Relative Value, Relative Safety and Relative Timing indicators, with Relative Value underweighted and Relative Timing overweighted. Despite having the highest VST ranking in the industry group, Apple was rated a "hold", not a "buy" by VectorVest on Friday. Of VectorVest's 7 highest-rated computer makers, only one other, Dell, Inc. (NASDAQ:DELL), was rated a "hold". What Dell and Apple had in common was Relative Timing scores below 1.00.

Hedging The 10 Highest Rated Gold And Silver Stocks

The table below shows the VST rankings for Apple, Dell, and 4 other of the 7 highest-rated computer makers (one of the 7, Pinnacle Data Systems, Inc. (NYSEMKT:PNS), has no options traded on it, so it wasn't included). It also shows the costs, as of Friday's close, of hedging these 6 stocks against greater-than-35% declines over the next several months. For comparison purposes, I've included the Technology Select SPDR ETF (XLK) as well. First, a reminder about what optimal puts are, and a note about why I've used 35% as a decline threshold; then, a screen capture showing the current optimal puts to hedge Apple against that threshold.

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.

Decline Thresholds

In this context, "threshold" is the maximum decline you are willing to risk. You can enter any percentage you like for a threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). Usually, I use 20% decline threshold when hedging, but two of these stocks, Silicon Graphics (SGI), and Cray, Inc. (CRAY), were too expensive to hedge using a 20% threshold (i.e., the cost of hedging them against a 20% decline was itself more than 20% of position value, so Portfolio Armor indicated there were no optimal contracts available for them). There were optimal contracts for all of these stocks against a 35% threshold, so that's the decline threshold I've used here.

The Optimal Puts For AAPL

Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of GLD against a greater-than-20% drop between now and June 15th, 2012. A 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.

VST Rankings And Hedging Costs As Of Thursday's Close

Aside from the ETF XLK, listed at the bottom for comparison purposes, the computer companies below are listed in descending order of their VST (Value, Safety, Timing) rankings as of Friday's close. The hedging data is as of Friday's close as well, and is presented as a percentage of position value.



VST Ranking

Hedging Cost

(AAPL) Apple, Inc. 1.32 1.28%*


Hewlett-Packard 1.19 3.57%**
(DELL) Dell, Inc. 1.10 2.08%**
(SGI) Silicon Graphics 1.08 23.3%***
(SMCI) Super Micro Comp. 1.06 8.76%*
(CRAY) Cray, Inc. 1.03 14.0%*
(XLK) Tech Select SPDR 1.06 3.41%***

*Based on optimal puts expiring in April 2012.

**Based on optimal puts expiring in May 2012.

***Based on optimal puts expiring in June 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.