Twelve stocks beat earnings estimates on Monday, versus two that just met estimates, and nine others that failed to meet estimates. Of the twelve stocks that beat estimates, eleven had options traded on them. The table below shows the actual earnings, the consensus estimates, and the costs, as of Monday's close, of hedging those 11 stocks against greater-than-21% 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 (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 one of the stocks below, Sysco Corporation (SYY).
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). Usually, I use 20% decline thresholds when hedging equities, but one of these stocks, Changyou.com Limited, (CYOU), was too expensive to hedge using a 20% threshold (i.e., the cost of hedging it against a 20% decline was itself more than 20% of position value, so Portfolio Armor indicated there were no optimal contracts available for it). There were optimal contracts for CYOU against a 21% threshold, so that's the decline threshold I've used for all of the names here.
The Optimal Puts For SYY
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of SYY against a greater-than-21% drop between now and August 17th. 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 Monday's Close
The hedging data below is as of Monday's close, and is presented as percentages of position values. The "Actual" column shows the stocks' actual earnings announced Monday, and the "Estimate" column shows what the consensus estimates were for them.
Note that several of these names were quite expensive to hedge. Investors in those names that are concerned about downside risk may want to simply reduce their positions instead. Recall also that we've observed examples where high optimal hedging cost has presaged poor performance.
|GSM||Globe Specialty Metalis, Inc.||$0.22||$0.19||17.7%***|
|NNN||National Retail Properties Comm||$0.43||$0.40||4.96%***|
|HMY||Harmony Gold Mining Co. Ltd.||$0.32||$0.30||5.15%**|
|NLSN||Nielson Holdings NV||$0.50||$0.48||19.1%**|
|SPY||SPDR S&P 500||-||-||1.87%***|
*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.