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David Pinsen
  • on Portfolio Strategy & Asset Allocation
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I founded Launching Innovation, LLC, to bring together developers, designers, and academic finance experts to create easy-to-use tools to solve complex problems for investors.
My company:
Portfolio Armor
My blog:
Steam Catapult
  • Two Ways Of Hedging Disney

    Dying To See Star Wars

    One of the trending hashtags on Twitter in recent weeks was #ForceForDaniel, a campaign to get an early screening of the new Star Wars movie for a dying fan, Daniel Fleetwood. Director J.J. Abrams had the film screened for the man at his home, as The Verge noted below.

    J.J. Abrams helped a dying Star Wars fan see The Force Awakens early

    - The Verge (@verge) November 5, 2015

    It wasn't the first time, incidentally, that Abrams accommodated a dying fan: In 2009, he gave the late Randy Pausch (of Last Lecture fame) a cameo in his Star Trek reboot.

    A Boost For Disney

    The new Star Wars movie isn't coming out until next month, but apparently it's already contributed to strong earnings for Disney (NYSE:DIS), which bought the Star Wars franchise from George Lucas. As a result of its earnings this week, and the #ForceForDaniel thing, Disney was one of the top trending stocks on StockTwits on Thursday, so I thought I'd take a look at the cost of hedging it. Below are two ways of doing that, as of Thursday's close (screen caps via the Portfolio Armor iOS app*).

    Higher Cost. Uncapped Upside

    These were the optimal puts as of Thursday's close to hedge a thousand shares of DIS against a greater-than-20% drop over the next several months.

    As you can see at the bottom of the screen capture above, the cost of this put protection was $1,960, or 1.73% of position value. To be conservative, the cost of the puts was calculated at the ask price; in practice, an investor can often buy puts for less (i.e., at some price between the bid and ask), so the actual cost of these puts would likely have been less.

    Lower Cost. Upside Capped at 15%

    A DIS investor could have wiped out nearly all the cost of hedging against a >20% drop over the next several months by capping his upside at 15%, with the optimal collar below.

    As in the optimal put example above, the cost here was calculated conservatively, assuming the put leg was bought at the ask and the call leg was sold at the bid; since, in practice, you can often buy and sell options within the bid-ask spread, in reality, this optimal collar likely would have had a negative cost.

    As we mentioned in a previous post, in some cases, hedges like the ones above can provide more protection than promised. Here is a recent example.

    *In the small world department, a portion of the proceeds from each download of the iOS app goes to Apple, whose co-founder, Steve Jobs, was a director and large shareholder of Disney, which bought his Pixar animation studio -- which started out as a division of Lucasfilm.

    Tags: DIS
    Nov 06 4:56 AM | Link | Comment!
  • Two Ways Of Hedging Activision Blizzard

    Our Current Number One Stock: Activision Blizzard

    Activision Blizzard (NASDAQ:ATVI), which just announced its purchase of King Digital (NYSE:KING), the Dublin-based maker of the Candy Crush mobile game, currently has the highest potential return of any security in Portfolio Armor's universe, at 20.8%. Potential return, in our terminology, is a bullish estimate of how a security will perform over the next 6 months. Below, we'll explain how we calculate potential return, and then we'll show a couple of ways of hedging ATVI.

    How We Calculate Potential Return

    Essentially, we start with the assumption that a security's return over the next six months will begin to revert to its long term mean six-month return. Then, we test that assumption by looking at the prices of options on the security that expire in approximately six months. That test of option market sentiment gives a forward-looking element, because it represents the views of option market participants on where the underlying security is likely to be several months out.

    We backtested this security selection method by running our analysis every trading day from 1/2/2003 to 10/31/2013 and then looking at the actual returns of the securities with the highest potential returns on our daily scans over the next six months. Over that 11-year period, we conducted 25,412 comparisons of our calculated potential returns to actual returns, an average of 9.4 top-ranked securities each trading day. The average potential return we calculated was 22.4%. The average actual return over the next six months, unhedged, was 6.84%. Since the average actual return was 0.3x the average potential return, we use that 0.3x multiple to derive expected returns from our potential returns. While a potential return represents a bullish upside, an expected return is the more likely result.

    To give an idea of the sort of names that currently score highly according to this method, these were the top four names after ATVI on our ranking as of November 3rd:

    • Alphabet (NASDAQ:GOOGL)
    • Nike (NYSE:NKE)
    • Expedia (NASDAQ:EXPE)
    • Regeneron (NASDAQ:REGN)

    Two Ways of Hedging ATVI

    Here are two ways of hedging ATVI against a >20% drop by May. Although our top-ranked names perform well on average, sometimes they crash, so crash-protection can be helpful - as it was when Sketchers (NYSE:SKX) tanked 31% in one day recently.

    With Optimal Puts. Upcapped Upside, Higher Cost

    These were the optimal puts, as of Tuesday's close, to hedge 500 shares of ATVI against a > 20% drop by May (screenshots below via the Portfolio Armor iOS app).

    As you can see at the bottom of the image above, the cost of this protection was $600, or 3.35% as a percentage of position value. Note, though, that this cost was calculated conservatively, using the ask price of the puts; in practice, you can often buy the puts for less (at some price between the bid and ask).

    With an Optimal Collar. Capped Upside, Lower Cost

    Here we hedge ATVI against the same decline threshold while capping its upside at the potential return we've calculated for it, 20.8%.

    In this case, the put leg of the collar is at the same strike as the optimal put -- often, that's not the case. In any case, the cost of the put leg is the same, as you can see above, $600, or 3.35% as a percentage of position value. But if you look at the call leg below, you'll see the income generated from selling the calls was $315, or 1.76% as a percentage of position value.

    So the net cost of this optimal collar was $285, or 1.59%, as a percentage of position value. However, as in the case of the optimal put above, the cost here was calculated conservatively (assuming the puts were bought at the ask and the calls sold at the bid), so, in practice, an investor likely could have opened this collar for less.

    Tags: ATVI
    Nov 04 3:17 AM | Link | Comment!
  • Seeking Advertising

    An Admission

    I have an admission to make. One of the reasons I submit articles to Seeking Alpha is to market my products (my web app, which facilitates the hedged portfolio method I write about, and, secondarily, my iOS app, which helps investors hedge). I know I'm not alone in this; in fact, some of the top contributors on Seeking Alpha write, in part, to market their wares. Chuck Carnevale's articles often feature his F.A.S.T. Graph software for quickly analyzing stocks; Chris DeMuth, Jr.'s articles often mention his premium subscription product via Seeking Alpha's Marketplace, as well as his hedge fund; a recent article by Michael Gayed, CFA, mentioned one of his firm's mutual funds; etc.

    The Price of Content

    Another reason I write is because Seeking Alpha pays its exclusive contributors.

    "No man but a blockhead ever wrote except for money" - Samuel Johnson

    Seeking Alpha made a commitment to quality content in 2011 when it started sharing advertising revenue with exclusive contributors, the first crowd-sourced financial website to do so, as CEO Eli Hoffmann recently mentioned on a contributor forum. This was an important step in encouraging non-blockheads, to borrow the expression of Samuel Johnson (pictured above), to contribute to the site. Although this is an equitable arrangement, it's probably not enough, on its own, to motivate most contributors. Many of us are also motivated by the opportunity to promote ourselves, our ideas, or our products or services. There are, of course, non-monetary motivations for us writing (more on those in a bit), but, generally speaking, content has a price. And the advertising opportunity offered by articles is part of the price.

    A Delicate Balance

    Seeking Alpha lets us link to our own sites, and mention our own products and services in articles, provided we add value to non-users of our wares, and that we aren't overly promotional. This is a delicate balance to strike, but one I think Seeking Alpha has managed fairly well. examples of this can be seen in articles by top contributors such as Chuck Carnevale.

    As we mentioned above, Chuck's articles often feature his software product, F.A.S.T. Graphs, but his articles also offer information for readers who don't use his product, and he has a loyal and grateful readership. See, for example, the top comment on a recent article by Chuck:

    Sage advice from a wise long term investor. Love your articles Chuck!

    Clearly, Chuck is adding value to that reader, and to many others, myself included. This is a win-win-win situation for Chuck, his readers, and Seeking Alpha.

    Non-Monetary Reasons For Writing

    Like most aphorisms, Samuel Johnson's one above is a bit of an oversimplification. There are, of course, non-monetary reasons for writing. Motivation also comes from the opportunity to share ideas, flesh out our thoughts, and engage with readers and other contributors. Even critical readers can be a source of ideas. Seeking Alpha contributor Joseph Porter shared an example of this in a recent article of his ("Browne's Permanent Portfolio Vs. Porter's ETF Retirement Portfolio"):

    My last article drew some rather critical comments, some of which were quite interesting;1 one comment in particular brought up the Harry Browne Permanent Portfolio - something I had not encountered before.2

    Porter must not have seen my 2011 article on the Permanent Portfolio, "Permanent Portfolio Investing With A Hedge", but he was fortunate to hear about Harry Browne's strategy from one of his commenters. This, incidentally, gets to a point worth bearing in mind when we read articles on Seeking Alpha: sometimes the subject matter is familiar to us, and a recap of it feels redundant, but there are often others -- including knowledgeable investors -- coming across the topic for the first time, so we ought to bear that in mind.

    Other Forms of Advertising

    The most obvious form of advertising on Seeking Alpha is the ads you see on the margin when you read an article. From my experience, these tend to be somewhat relevant ads. There are the brokerage ads which are relevant to probably all of us, and there are some that appear more targeted to the specific content of the article. For example, after being notified about new comments on it, I recently looked back at an article I wrote last month, after the crash in shares of Tetraphase Pharma (NASDAQ:TTPH) ("Tetraphase Pharma Offers A Lesson In Risk Management"); the ad on the right when I looked was for the Janus Velocity Tail Risk Hedged Large Cap ETF (NYSEARCA:TRSK). Since my article included a discussion of hedging, this is a fairly relevant ad.

    Other forms of advertising on the site are for Seeking Alpha's subscription-based product, Seeking Alpha Pro, and for its Premium Contributor Marketplace. Again, these are relevant ads for most of us, and the subscription revenue Seeking Alpha earns from these products helps support the free content all of us enjoy.


    As contributors, we owe it to Seeking Alpha, its readers, and our fellow contributors to try to add value in our articles. But not every reader will find value in every article. If you don't find value in one, be open to the possibility that other readers may find value in it. Readers and commenters alike benefit when we respect each other and the Seeking Alpha platform we all enjoy.

    Tags: TRSK, TTPH
    Nov 01 11:57 PM | Link | Comment!
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