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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
  • Three Ways To Lock In Qihoo Gains 0 comments
    Jun 17, 2013 8:33 PM | about stocks: QIHU

    With Qihoo 360 Technology Up Big Today, 3 Ways To Hedge It:

    1) Hedging With Optimal Puts

    Most expensive, uncapped upside.

    These are the optimal puts*, as of Monday's close, to hedge 1,000 shares of QIHU against a greater-than-20% drop between now and December 20th.

    As you can see at the bottom of the screen capture below, the cost of this protection, as a percentage of position value, was 12.22%.

    2) Hedging With An Optimal Collar

    Less expensive, 20% upside cap.

    For investors willing to cap their potential upside at 20% between now and December 20th, this is the optimal collar, as of Monday's close, to hedge 1,000 shares of QIHU against a greater-than-20% drop over the same time frame.

    As you can see at the bottom of the screen capture above, the net cost of this collar, as a percentage of position value, was 3.79%.

    3) Hedging With A Negative Net Cost Optimal Collar

    Pays you to hedge. 15% upside cap.

    If you're willing to cap your potential upside at 15% between now and December 20th, this is the optimal collar to hedge 1,000 shares of QIHU against a greater-than-20% drop over the same time frame.

    As you can see at the bottom of the screen capture above, the net cost of this collar was negative, meaning you would have gotten to paid to hedge in this case.

    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.

    **Optimal collars are the ones that will give you the level of protection you want at the lowest net cost, while not limiting your potential upside by more than you specify. The algorithm to scan for optimal collars was developed in conjunction with a post-doctoral fellow in the financial engineering department at Princeton University. The screen captures above come from the Portfolio Armor iOS app.

    Stocks: QIHU
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