37 Versus 8
On Thursday, 37 NYSE names made new 52-week highs, versus 8 that made new 52-week lows. Interestingly, 17 of the names making new highs weren't stocks -- they were closed-end municipal bond funds, such as the Nuveen Premium Income Municipal Fund II (NYSE:NPM).
I recall Bill Gross being bullish on municipal bonds at the beginning of this year, in contrast to Meredith Whitney's bearishness; closed-end fund investors now apparently agree with Gross. In this article, though, we'll focus on stocks. The table below shows the hedging costs of 7 of the stocks that made new highs against greater-than-20% declines over the next several months, using optimal puts.
For comparison purposes, I've added the iShares Russell 1000 Index ETF (NYSEARCA:IWB). First, a reminder about what optimal puts are, and why I've used 20% as a decline threshold; then, a screen capture showing the optimal puts to hedge one of the stocks that made new highs Thursday: Southern Company (NYSE:SO).
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 SO
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of SO against a greater-than-20% drop between now and May 18, 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.
Hedging Costs as of Thursday's Close
The data below is as of Thursday's close, and is presented as percentages of position value.
|(NYSE:WES)||Western Gas Partners, L.P.||3.67%*|
|(NYSE:TSN)||Tyson Foods, Inc.||7.62%***|
|(NYSE:THS)||TreeHouse Foods, Inc.||7.83%*|
|(NYSE:TJX)||The TJX Companies, Inc.||3.92%***|
|(NYSE:NGLS)||Targa Resources Partners LP||13.0%**|
|(SO)||Southern Company, Inc.||1.20%*|
iShares Russell 1000 Index
*Based on optimal puts expiring in May 2012.
**Based on optimal puts expiring in June 2012.
***Based on optimal puts expiring in July 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.