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David Pinsen
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As the founder of Launching Innovation, David Pinsen has brought together a talented team of developers, designers, and academic finance experts to create easy-to-use tools to solve complex problems for investors. David Pinsen brings 17 years of business development, innovation, and financial... More
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  • Hedging Against Fed Tapering Concerns 0 comments
    Aug 29, 2013 7:54 PM | about stocks: T

    Fed Tapering Raises Bond Concerns

    With the Federal Reserve on course to taper its purchases of Treasury securities, concerns have been raised that this could lead to the end of the long bull market in bonds. Here is one way for investors in the iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT) to hedge against a significant correction in Treasury bonds over the next several months.

    Hedging With An Optimal Collar

    Pays You To Hedge, 5% upside cap.

    If you're willing to cap your potential upside at 5% between now and late March (bear in mind that the average historical return for TLT over a 7 month time frame is about 3.9%), this is the optimal collar to hedge 1000 shares of TLT against a greater-than-11% 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 get 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 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 uses an algorithm developed in conjunction with a post-doctoral fellow in the financial engineering department at Princeton University to scan for optimal collars. The screen captures above come from the Portfolio Armor iOS app.

    Stocks: T
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