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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 GDX 0 comments
    Aug 27, 2013 4:51 PM | about stocks: GLD, GDX, BBRY

    Although the SPDR Gold Trust ETF (NYSEARCA:GLD) was up close to 1% on Tuesday, shares of the Market Vectors Gold Miners ETF (NYSEARCA:GDX) were down more than 4% on the day. Nevertheless, it was still possible for GDX longs to get paid to hedge their shares as of Tuesday's close, using the negative cost collar below.

    This was the optimal collar*, as of today's close, to hedge 500 shares of GDX against a >11% drop between today and March 21st, for an investor willing to cap his potential upside at 11% 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 $10 to do so.

    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 BlackBerry (NASDAQ:BBRY).

    *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: GLD, GDX, BBRY
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