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David Pinsen
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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
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Steam Catapult
  • Hedging The Dow At An All-Time High 0 comments
    Mar 5, 2013 10:20 PM | about stocks: 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 (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%***

    UNHUnited 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
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