In a Seeking Alpha article published earlier this year ("Hedging 10 High 'Relative Timing' stocks"), we described VectorVest's Relative Timing indicator, which is a measure of technical strength. In addition to applying that to stocks, VectorVest also applies it to industry groups, by aggregating the data for the stocks within each industry group.
Sorting VectorVest's 225 industry groups by Relative Timing on Thursday showed that the Business Services (Leasing) industry group was currently the best performing industry group. In this article, we'll look at the hedging costs for 6 of the highest rated stocks in the leasing industry group.
Hedging 6 of the Highest-Rated Leasing Stocks
Recall that VST (Value, Safety, Timing), VectorVest's master ranking, is made up of a weighted average of its Relative Value, Relative Safety and Relative Timing indicators, with Relative Value underweighted and Relative Timing overweighted. 6 of the highest rated leasing stocks in VectorVest's universe had VST ratings ranging from 1.23 to 1.30 (on a scale of 0 to 2). The table below shows those VST ratings, as well as the costs, as of Thursday's close, of hedging these stocks against greater-than-20% declines over the next several months, using optimal puts.
For comparison purposes, I've also added the cost of hedging the SPDR S&P 500 Trust ETF (SPY). First, a reminder about what optimal puts are, plus an explanation of decline thresholds; then, a screen capture showing the optimal puts to hedge one of these leasing stocks, Aircastle LTD (AYR).
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" is the maximum decline you are willing to risk. 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've used 20% thresholds for all of the names below.
The Optimal Puts For AYR
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of AYR against a greater-than-20% drop between now and July 20, 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 names below are listed in order of their VectorVest VST (Value, Safety, Timing) ranking. Hedging costs are presented as percentages of position value. All of the names below, including the comparison ETF SPY, are rated "buy" by VectorVest.
|URI||United Rentals Inc.||1.30||16.8%**|
|RRR||RSC Holdings, Inc.||1.29||5.12%**|
|R||Ryder Systems, Inc.||1.28||4.21%*|
|HTZ||Hertz Global Holdings||1.23||15.4%**|
|SPY||SPDR S&P 500 Trust||1.11||2.10%**|
*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.