Hedging 5 Stocks That Were Upgraded Friday

by: David Pinsen

5 Stocks That Were Upgraded to "Buy" or "Outperform"

Analysts at Robert W. Baird upgraded two stocks to outperform on Friday, Alexion Pharma (NASDAQ:ALXN), and Sealed Air Corporation (NYSE:SEE). In this post, we'll look at the costs of hedging those two stocks, along with the costs of hedging three other stocks that were upgraded by analysts at other investment firms on Friday. The table below shows the costs of hedging Alexion Pharma, Sealed Air Corporation, Cobalt International Energy (NYSE:CIE), ConocoPhillips (NYSE:COP) and Bank of Nova Scotia (NYSE:BNS) against greater-than-20% declines over the next several months, using optimal puts.

A Comparison

For comparison purposes, I've also included the costs of hedging the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) against the same decline. First, a reminder about what optimal puts are, and a note about the 20% decline threshold. Then, a screen capture showing the current optimal puts to hedge one of the stocks that was upgraded today, ConocoPhillips.

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.

Decline Thresholds

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 stocks below.

The Optimal Puts For COP

Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of COP against a greater-than-20% drop between now and August 17th. A note about these optimal put options and the 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 Friday's Close

The hedging data in the table below is as of Friday's close, and is presented as percentages of position values. The name of the firm that employs the analyst who upgraded each company to a "buy" or "outperform" is listed to the right of the upgraded company's name.



Analyst's Firm

Hedging Cost

ALXN Alexion Pharma Robert W. Baird 5.87%**
CIE Cobalt International Energy Howard Weil 13.9%*
COP ConocoPhillips Deutsche Bank 2.31%**
BNS Bank of Nova Scotia BMO Capital Markets 3.26%***
SEE Sealed Air Corp. Robert W. Baird 4.23%*
*Based on optimal puts expiring in July
**Based on optimal puts expiring in August
***Based on optimal puts expiring in September

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.