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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 Hedge Tesla Ahead Of Earnings 4 comments
    Aug 6, 2013 5:32 PM | about stocks: TSLA, AEO

    One of the concerns often raised about hedging is the cost of it. But by scanning for optimal collars you can reduce the cost of hedging -- sometimes to the point where you can get paid to hedge. That was the case with American Eagle Outfitters (NYSE:AEO) yesterday, and that was the case with Tesla Motors (NASDAQ:TSLA) today.

    This was the optimal collar, as of this afternoon, to hedge 200 shares of TSLA against a >15% drop over the next several months, for an investor willing to cap his potential upside at 15% over the same time frame:

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

    Note that, to be conservative, Portfolio Armor calculated the cost of this hedge by using the bid price of the call leg and the ask price of the put leg. In practice, you can often sell calls for more (at some price between the bid and ask) and buy puts for less (again, at some price between the bid and ask), so, in actuality, an investor opening the optimal collar above would likely have netted more than $650 to do so.

    *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. Portfolio Armor's 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: TSLA, AEO
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Comments (4)
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  • David Pinsen
    , contributor
    Comments (1049) | Send Message
     
    Author’s reply » If you opened this hedge ahead of TSLA's earnings, you protected your downside, captured Thursday's pop, and made a few extra dollars in addition.
    9 Aug 2013, 12:19 AM Reply Like
  • Glenn Abrett
    , contributor
    Comments (1573) | Send Message
     
    Pretty damn cool -- am way overextended, in serious danger of falling in love with the stock -- I should sell some and buy the car as I promised myself but simply can't seem to push that sell button. Perhaps this is the way to go for me. Thanks.
    12 Aug 2013, 09:46 PM Reply Like
  • David Pinsen
    , contributor
    Comments (1049) | Send Message
     
    Author’s reply » Glad to hear this could come in handy for you. If you have any questions, feel free to email or DM me. Good luck.
    13 Aug 2013, 04:11 PM Reply Like
  • David Pinsen
    , contributor
    Comments (1049) | Send Message
     
    Author’s reply » Okay, if you opened this hedge before earnings and didn't close it, your TSLA shares got called away today. Congratulations: you were up about 363% on that position YTD, not including the few extra bucks you netted on the hedge.
    23 Aug 2013, 04:08 PM Reply Like
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