Seeking Alpha

David Pinsen's  Instablog

David Pinsen
Send Message
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
  • Insulating The Shock From Taser's Drop 5 comments
    Oct 4, 2013 2:10 PM | about stocks: TASR

    Taser International (NASDAQ:TASR) shares were down more than 5% intraday Friday, as news of the company's price cuts on its Axon cameras continued to weigh on the stock. Recall that we showed a way to hedge Taser in a post earlier this week ("A Shockingly Inexpensive Way To Hedge Taser International"). In today's post, we'll look at how that hedge has reacted so far to Taser's drop.

    The Inexpensive Taser Hedge

    This was the optimal collar*, as of Tuesday's close, to hedge 1000 shares of TASR against a greater-than-20% drop over the next six months, for an investor willing to cap his upside at 19% 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 negative, meaning the investor would have gotten paid to hedge.

    How That Hedge Has Reacted To TASR's Drop

    Here is a quote on the call leg as of Friday afternoon:

    And here is a quote on the call leg:

    How That Hedge Has Cushioned TASR's Drop

    TASR closed at $15.94 on Tuesday, October 1st, when we ran that hedge. A shareholder who owned 1000 shares of TASR and opened the collar above on October 1st had $15,940 in TASR stock plus an outlay of -$400 on the hedge, so $15,540 taking into account the hedge.

    TASR traded at $14.01 intraday Friday, down 12% from its closing price on Tuesday, so the investor's shares were worth $14,010, his put options were worth $1,550, and if he wanted to close out the short call leg of his collar, it would cost him $1,230. So: ($14,010 + $1,550) - $1,230 = $14,330, which represents a 7.8% drop from $15,540.

    More Protection Than Promised

    So, although TASR had dropped by 12% at the time of the calculations above, and the investor's hedge was designed to limit him to a loss of no more than 20% (i.e., it wasn't designed to protect him against smaller declines), he was actually down less than 8% on his combined hedge + underlying stock position at this point.

    Options Give You Options

    If TASR continues to decline, price of the call leg of this collar will decline, and the price of the put leg will increase, providing a greater cushion for an investor looking to close out the hedge and sell his shares. Or, if a hedged investor is bullish on TASR despite the decline, he could buy-to-close the call leg of this collar, sell his appreciated put leg, and use the proceeds to buy more TASR shares. No need for a hasty decision though, since as long as the investor his hedged, his downside is limited.

    *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: TASR
Back To David Pinsen's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (5)
Track new comments
  • jeffreywilens
    , contributor
    Comments (103) | Send Message
     
    TASR is not a good stock for hedging with collars. Look at the trading history in 2004 and 2007/2008 during the last spikes. The number of days at the "peak" is very limited, the premiums on options not so fantastic, and the odds of optimizing the creation of a collar minimal.

     

    The big problem is the stock has trade in "spires" (with rapid steep ascents and cliff-like drop offs) only form a new spire. This could be the last spire for now, but more likely this is the first spire that just formed the past week. Your hedge will be detrimental if this is only the first spire to form between now and March 2014.
    5 Oct 2013, 01:10 PM Reply Like
  • David Pinsen
    , contributor
    Comments (1048) | Send Message
     
    Author’s reply » Did you read this post, and the original post it links to ( http://bit.ly/17JLnp4 )? Because they essentially refute your comment. I posted this collar after the stock had made an 83% run, and the optimal collar paid the user to hedge.

     

    If you're long the stock and hedged in this way, and you believe another "spire" is going to occur within the next six months, you can buy-to-close the call leg for less than you got paid for it and eliminate your upside cap. You can also sell your appreciated put leg and buy more of the stock. Being hedged gives you those choices, and in the meantime, as long as you're hedged, you're protected if TASR drops further than you expect.
    6 Oct 2013, 01:00 PM Reply Like
  • jeffreywilens
    , contributor
    Comments (103) | Send Message
     
    Sorry David I don't agree. Collars are very difficult to time. Sure you can buy to close the upside cap and pay less than you bought it for if you time it just right. But if the stock spikes up suddenly you won't be able too. Collars are a defensive position and TASER is a 5x to 10x play off its $6 price early this year.

     

    You talk about a spire forming in six months, a spire will form in 2-3 days not six months. But which days?
    7 Oct 2013, 08:32 PM Reply Like
  • David Pinsen
    , contributor
    Comments (1048) | Send Message
     
    Author’s reply » We'll have to agree to disagree then, Jeffrey, but I appreciate your comments. You're right that collars are defensive positions; but at the time I posted this hedge, TASR longs who owned the stock from mid-August were up 83% (and, as you note, up even more from earlier in the year). So hedging at that point was less a matter of predicting whether any "spires" would happen in the future than locking in most of an investor's recent gains while allowing a bit more room to run to the upside.

     

    Of course, if you are confident that the stock is going to run up more over the next few days, then hedging may not be for you. Hedging is for investors who understand they don't know what the future holds.
    8 Oct 2013, 01:39 AM Reply Like
  • jeffreywilens
    , contributor
    Comments (103) | Send Message
     
    Are your hedgers still sitting in their collar David? The stock has gone pretty flat of late...obviously everyone is waiting for the next quarter report to see if they are getting penetration on the video front. If they are, the stock could experience a dramatic increase and those in a collar are going to miss most of it. Are you going to recommend closing the hedge before the earnings announcement? Of course, the stock may run up in advance.
    21 Dec 2013, 12:23 PM Reply Like
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.