The financial social network StockTwits aggregates microblog posts about stocks - both those that originate on its own network and those posted on Twitter - that include a ticker symbol preceded by a dollar sign. StockTwits tracks unusual "social volume" of stocks - percentage increases or decreases in microblog posts about stocks over the previous 1, 7, 30 and 90 days.
What value there is in tracking the chatter about stocks on social media platforms such as StockTwits and Twitter remains to be seen. As James Mackintosh reported in the Financial Times last week ("Last tweet for Derwint's Absolute Return Fund"), the only hedge fund dedicated to using signals from Twitter to guide its investing recently shut down, and its operators have decided to instead offer their signals as a service to day traders. For a bullish take on the potential for data mining Twitter feeds (not just for finance, but for other applications as well), it's worth reading venture capitalist Mark Suster's post from last summer, "Why I'm Doubling Down on the Twitter Ecosystem."
In the meantime, it's interesting to note the limited overlap between the stocks with the highest social volumes and those with the highest trading volumes. Of the six stocks with the highest social volume over the last seven days, only three of them were among the 20 most widely-traded stocks on the NYSE or the Nasdaq on Friday - Dell, Inc. (DELL), Verifone Systems, Inc. (PAY),and Hewlett Packard Company (HPQ).
Hedging Five Of The Six Stocks With The Highest Social Volume
Of the six stocks with the highest social volume over the last seven days, Rosetta Genomics, Ltd. (ROSG) had no options traded on it. The table below shows the current costs of hedging the other five highest social volume stocks against greater than 20% declines over the next several months, using optimal puts.
For comparison purposes, I've added the PowerShares QQQ ETF (QQQ) to the table. First, a reminder about what optimal puts are, and an explanation of the 20% decline threshold. Then, a screen capture showing the optimal put option contract to hedge the comparison ETF, QQQ.
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" 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% decline thresholds for each of the names below.
The Optimal Put for QQQ
Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of the Nasdaq-tracking ETF QQQ against a greater than 20% drop between now and December 21st. Two notes about this optimal put option contract and its cost:
- To be conservative, the app 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 of the other names in the table below).
- Hedging costs for this ETF have risen significantly over the last few months. As we noted in an article published in late February ("Hedging A Handful Of Undervalued, Outperforming Stocks"), the cost of hedging QQQ then against the same decline threshold over the same length of time was 2.11% of position value.
Hedging Costs as of Friday's Close
The hedging costs below are as of Friday's close, and are presented as percentages of position values. The stocks are listed in order of increase in chatter on them (their social volume) on Stocktwits over the last seven days, as of Sunday. Note that NetApp, Inc. (NTAP) is the most expensive to hedge. If you own it as part of a diversified portfolio, and are content to let that diversification ameliorate your stock-specific risk, but are still concerned about market risk, you may want to consider buying optimal puts on an index-tracking ETF (such as QQQ) instead, as a way to hedge your market risk.
|PAY||VeriFone Systems, Inc.||6.71%*|
|TIF||Tiffany & Co.||6.04%**|
*Based on optimal puts expiring in October
**Based on optimal puts expiring in November
***Based on optimal puts expiring in December
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.