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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
  • Getting Paid To Limit Downside On VXX 0 comments
    Jun 21, 2013 1:54 AM | about stocks: VXX

    Getting Paid To Limit Downside On VXX

    Since inception, the iPath S&P 500 VIX Short Term Futures ETN (NYSEARCA:VXX) has declined nearly 99%, but it popped nearly 12% on Thursday, ad the market tanked. For VXX longs savoring their gains from Thursday, but wary of downside risk going forward, below is a way you can get paid to hedge.

    Hedging With A Negative Cost Optimal Collar

    Pays you to hedge, 20% upside cap.

    If you're willing to cap your potential upside at 20% between now and December 20th, this was the optimal collar, as of Thursday's close, to hedge 1000 shares of VXX 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 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: VXX
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