David Pinsen's  Instablog

With Netflix, Inc. (NFLX) shares up about 70% last week, downside protection may not be the first thing on NFLX longs' minds. But as our previous post about AAPL demonstrates, it can be prudent to hedge before a stock tumbles. For investors looking to hedge the Netflix after its big run-up, here are two ways to hedge it.

The first way uses optimal puts; this way is more expensive, but allows uncapped upside. These are the optimal puts, as of Friday's close, for an investor looking to hedge 10,000 shares of NFLX against a greater-than-20% drop between now and June 21:

(click to enlarge)

As you can see in the screen capture above, the cost of those optimal puts, as a percentage of position, is 13.09%.

An NFLX investor interested in hedging against the same, greater-than-20% decline over the same time frame, but also willing to cap his potential upside at 15% over that time frame, could use the optimal collar below to hedge.

As you can see at the bottom of the screen capture above, the net cost of this optimal collar is negative - that means that the NFLX investor would be getting paid to hedge in this case.

The algorithm to scan for optimal collars was developed in conjunction with a post-doctoral fellow in the financial engineering department at Princeton University, and is currently available on the web version of Portfolio Armor.

The screen captures above come from the latest build of the soon-to-come 2.0 version of the Portfolio Armor iOS app. Optimal collar capability will be available as an in-app subscription in the 2.0 version of the app.