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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
My blog:
Steam Catapult
  • Inexpensive Downside Protection For Spectra Energy 0 comments
    Apr 28, 2013 6:29 PM | about stocks: SE, GLD

    Hedging SE Against A >18% Drop

    In many 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. In the case of Spectra Energy (NYSE:SE), it cost the same on Friday to hedge against a >18% drop over the next several months as it did to hedge it against a >20% drop over the same time frame. The screen capture below shows the optimal puts*, as of Friday's close, to hedge 1000 shares of SE against a greater-than-18% drop between now and September 20th.

    As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value, was 0.96%**.

    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 SPDR Gold Trust ETF (NYSEARCA:GLD).

    *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 PhD. 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.

    Stocks: SE, GLD
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