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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
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Steam Catapult
  • A Way To Hedge Bill Ackman's Riskiest Investment 2 comments
    Aug 13, 2013 5:59 PM | about stocks: JCP

    On tonight's Charlie Rose, hedge fund manager Bill Ackman tells Charlie that JC Penney (JCP) is riskier than his other investments. Here is a way JCP longs can get paid to hedge JCP.

    This was the optimal collar, as of Monday's close, to hedge 1000 shares of JCP against a >17% drop over the next several months, for an investor willing to cap his potential upside at 10% 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 $50 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: JCP
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Comments (2)
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  • realist1900
    , contributor
    Comments (21) | Send Message
     
    If this is your strategy then just sell the stock.... ur downside is 1.7$ and upside is $1.3...there is no reason to have such a tight collar on ur stock unless u need to hold for tax purposes.

     

    vol skew is not in your favor in this collar. you are selling a lower vol (the call) to buy a higher vol (the put).

     

    useless.
    13 Aug 2013, 10:12 PM Reply Like
  • David Pinsen
    , contributor
    Comments (1046) | Send Message
     
    Author’s reply » It depends on what an investor's goals are. This was the optimal collar for an investor looking to limit his downside to 17% in the worst case scenario over the next several months and willing to cap his upside by 10% over the same time frame. If an investor wants more potential upside or less potential downside, he can scan for an optimal collar using different parameters. Granted, he will probably be looking at a more expensive hedge in that case. And as you note, selling the stock is another approach for an investor looking to limit his downside (and who isn't hopeful of any potential upside in the near future).
    14 Aug 2013, 03:35 AM Reply Like
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