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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
  • What If You Had Hedged Outerwall Before It's Drop? 0 comments
    Sep 18, 2013 3:54 PM | about stocks: OUTR

    Note: This was written on Tuesday, and posted on my Tumblr blog then, but I neglected to post it here at the time.

    Shares of Outerwall, Inc. (OUTR) are down about 13% intraday Tuesday, after the company lowered its forward guidance after hours Monday. In this post we'll look at how this drop would have impacted an OUTR shareholder who hedged with the optimal collar* shown below before yesterday's market close.

    This was the optimal collar, as of Monday's close, to hedge 1000 shares of OUTR against a greater-than-11% drop over the next several months, for an investor willing to cap his potential upside at 7% over the same time frame:

    As you can see at the bottom of the screen capture above, the net cost of that optimal collar was $100, or 0.18% of position value.

    How That Hedge Has Reacted To OUTR's Drop

    Here is how the put leg reacted:

    And here is how the call leg reacted:

    How That Hedge Protected Against Today's Drop

    OUTR closed at $55.97 on Monday. A shareholder who owned 1000 shares of it and bought the collar above had $55,970 in OUTR stock plus an outlay of $100 on the hedge, so $55,870 taking into account the hedge.

    As of Tuesday morning, OUTR is down about 13% at $48.75, so the investor's shares are worth $48,750, his put options were worth $6,870, and if he wanted to call out the short call leg of his collar, it would cost him $1,950. So: ($48,750 + $6,870) - $1,950 = $53,670. $53,670 represents a 3.9% drop from $55,870.

    More Protection Than Promised

    So, although OUTR had dropped about 13% intraday at the time of the calculations above, and the investor's hedge was designed to limit him to a loss of no more than 11%, he was actually down less than 4% on his combined hedge + underlying stock position at this point.

    *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: OUTR
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