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Hedging The Dow At An All-Time High

|Includes:SPDR Dow Jones Industrial Average ETF (DIA)

The Dow Hits An All-Time High

With the Dow Jones Industrial Average hitting all-time high today (albeit, not in inflation-adjusted dollars), in this post, we'll look at the current costs of hedging the Dow component stocks against greater-than-20% drops. We'll also look at the optimal puts1 to hedge a position in the Dow-tracking ETF DIA against the same decline threshold.

Two Reasons To Track Hedging Costs

The first reason to pay attention to hedging costs is if you're considering hedging. But another reason is that we've seen some examples of stocks with high optimal hedging costs underperforming those with lower optimal hedging costs. It will be interesting to revisit these Dow component stocks later this year and see if that pattern holds up.

Hedging Costs Of The Dow Components And DIA

The table below shows the costs, as of Tuesday's close, of hedging each Dow component, and the Dow-tracking ETF (NYSEARCA:DIA), against greater-than-20% declines over the next several months, using optimal puts.

Symbol

Name

Cost of Protection (as % of Position value)

AA

Alcoa Inc. Common Stock

3.11%***

AXP

American Express

1.72%***

BA

Boeing

1.30%*

BAC

Bank of America

3.20%*

CAT

Caterpillar

1.75%*

CSCO

Cisco Systems

2.50%*

CVX

Chevron

1.37%**

DD

E.I. du Pont de Nemours

1.71%***

DIS

Walt Disney

2.55%***

GE

General Electric

1.61%**

HD

Home Depot

1.04%*

HPQ

Hewlett-Packard

3.19%*

IBM

International Business Machines

1.12%***

INTC

Intel

2.14%***

JNJ

Johnson & Johnson

0.68%***

JPM

JP Morgan Chase

1.92%**

KO

Coca-Cola

0.65%*

MCD

McDonald's

0.65%**

MMM

3M

1.14%***

MRK

Merck

1.64%***

MSFT

Microsoft

1.83%***

PFE

Pfizer

1.03%**

PG

Procter & Gamble

1.17%***

T

AT&T

1.21%***

TRV

Travelers

1.80%***

UNH United HealthGroup, Inc. 2.10%**

UTX

United Technologies

1.17%*

VZ

Verizon Communications

1.11%***

WMT

Wal-Mart Stores

0.66%**

XOM

Exxon Mobil

1.25%***

DIA

SPDR Dow Jones Industrial Average ETF

0.64%**

*Based on optimal puts expiring in August

**Based on optimal puts expiring in September

***Based on optimal puts expiring in October.

The Optimal Puts To Hedge DIA

These were the optimal puts to hedge 1000 shares of DIA against a greater-than-20% drop as of Tuesday's close.

1Optimal 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 stocks and ETFs, scanning for the optimal ones. The screen capture below from the latest build of the soon-to-come 2.0 version of the Portfolio Armor iOS app.

Stocks: DIA