Hedging 7 Stocks that met or beat estimates Wednesday
Ten stocks beat earnings estimates on Wednesday, and two stocks met estimates (versus six that failed to meet estimates). Of the stocks that beat or met estimates, seven had options traded on them. The table below shows the actual earnings, the consensus estimates, and the costs, as of Wednesday's close, of hedging those 7 stocks against greater-than-20% declines over the next several months, using optimal puts.
For comparison purposes, I've also added the costs of hedging the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). First, a reminder about what optimal puts are, plus an explanation about decline thresholds; then, a screen capture showing the current optimal puts for the comparison ETF, SPY.
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 have used 20% decline thresholds for each of the names below.
The Optimal Puts For SPY
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of SPY against a greater-than-20% drop between now and June 15th. 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.
click to enlarge
Hedging Costs As Of Wednesday's Close
The hedging data below is as of Wednesday's close, and is presented as percentages of position values. The "Actual" column shows the stocks' actual earnings announced this week, and the "Estimate" column shows what the consensus estimates were for them.
|GS||Goldman Sachs Group, Inc.||$1.84||$1.46||5.18%**|
|ASML||ASML Holding NV||$0.87||$0.7||7.11%**|
|SCHW||Charles Schwab Corp||$0.13||$0.13||6.24%*|
|SPY||SPDR S&P 500||-||-||1.49%*|
*Based on optimal puts expiring in June
**Based on optimal puts expiring in July
***Based on optimal puts expiring in August
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.