Keeping Coca-Cola Shares From Going Flat
With shares of The Coca-Cola Company (NYSE:KO) hovering near a 52-week high, here is a way investors can lock in most of their gains with a low-cost hedge.
Hedging KO Against A >13% Drop
In most of our previous posts on hedging equities, we've used 20% decline thresholds, since 20% is large enough decline that it reduces the cost of hedging, but not so large to be an insurmountable decline to recover from. KO is extremely cheap to hedge now, so, instead of hedging against a greater-than-20% drop, here we'll look at hedging against a greater-than-13% drop. The screen capture below shows the optimal puts*, as of Tuesday's close, to hedge 1000 shares of KO against a greater-than-13% drop between now and mid-August.
As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value, was 0.76%**. By way of comparison, the cost of hedging against the same decline in the SPDR S&P 500 ETF (NYSEARCA:SPY) over a slightly longer time frame (until September 20th), was 1.32% of position value. It's rare for it to be less expensive to hedge an individual stock than it is to hedge SPY. That gives you a sense of sanguine options market participants are about KO's perceived lack of downside risk.
Possibly More Protection Than Promised
In some cases, hedges such as the ones above can provide more protection than promised. For a recent example of that, see this post about hedging shares of the miner Cliffs Natural Resources (NYSE:CLF).
*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 stocks and ETFs, scanning for the optimal ones. The screen captures above are from the Portfolio Armor iOS app.
**Note that, to be conservative, Portfolio Armor calculates hedging 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 ask.