Seeking Alpha contributor David Hunkar included a graphic in a recent article of his ("The 10 Most Traded ADRs on the NYSE, Nasdaq, and OTC in 2011") that illustrated a couple of interesting points. One was how Russian companies dominate depository receipt trading on the London Stock Exchange. The other was how, in the U.S., the volume of the 10 most traded American Depository Receipts (ADRs) on the NYSE dwarfs that of the top10 ADRs on the Nasdaq and OTC markets. In this post, we'll look at the current costs of hedging the 10 most traded ADRs on the NYSE. The table below shows the costs, as of Tuesday's close, of hedging them against greaterthan26% declines over the next several months, using optimal puts.
A Comparison
For comparison purposes, I've also added the cost of hedging the iShares MSCI EAFE Index ETF (NYSEARCA:EFA) against the same decline, using optimal puts. First, a reminder about what optimal puts are, plus a note about why I've used a 26% decline threshold here; then, a screen capture showing the optimal puts for one of these ADRs, Cemex, S.A.B. de C.V. (NYSE:CX).
About Optimal Puts
Puts are options that give an investor the right, but not the obligation, to sell a particular security at a specified price (the strike price of the option), on or before a certain date (the expiration date of the option). As such, the puts can offer protection for investors that own a security. 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 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 often use 20% thresholds when hedging equities, but AlcatelLucent (ALU) and Cemex, S.A.B. de C.V. were too expensive to hedge using 20% thresholds (i.e., the cost of hedging them against greaterthan20% declines was itself greater than 20%, so Portfolio Armor indicated no optimal contracts were found for them). It was possible to hedge all of the names against greaterthan26% declines, so that's the decline threshold I've used here.
The Optimal Puts For CX
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of Cemex against a greaterthan26% drop between now and July 20th. 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 (the same is true for the other names in the table below).
Hedging Costs As Of Tuesday's Close
The hedging costs below are as of Tuesday's close and are presented as percentages of position values.
Symbol  Name 
Hedging Cost

NOK  Nokia Corporation  14.3%** 
ALU  AlcatelLucent  18.5%* 
VALE  Vale, S.A.  10.5%* 
PBR  Petroleo Brasileiro S.A.  3.57%** 
TSM  Taiwan Semiconductor  5.81%** 
ITUB  Itau Unibanco Holding S.A.  3.56%* 
Cemex, S.A.B. de C.V.  17.2%**  
BBD  Banco Bradesco, S.A.  3.34%* 
BP  British Petroleum  2.23%** 
GGB  Gerdau, S.A.  7.79%* 
EFA  iShares MSCI EAFE Index ETF  1.52%* 
*Based on optimal puts expiring in June
**Based on optimal puts expiring in July
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.