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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
  • Two Ways Of Locking In Google Gains 0 comments
    Oct 18, 2013 7:45 PM | about stocks: GOOG

    Google Breaks $1,000

    Shares of Google (NASDAQ:GOOG) broke $1,000 on Friday, climbing nearly 14% in the wake of a strong earnings report. For investors looking to lock in some of their gains and add some downside protection, here are two ways to hedge.

    1) Hedging With Optimal Puts

    Higher cost, but uncapped upside.

    These were the optimal puts*, as of Friday's close, to hedge 200 shares of GOOG against a greater-than-10% drop between now and March 21st.

    As you can see at the bottom of the screen capture below, the cost of this protection, as a percentage of position value, was 2.88%.

    2) Hedging With An Optimal Collar

    Less expensive. 10% upside cap.

    If you were willing to cap your potential upside at 10% between now and March 21st, this was the optimal collar** to hedge 200 shares of GOOG against a greater-than-20% drop over the same time frame.

    As you can see at the bottom of the screen capture above, the net cost of this collar, as a percentage of position value, was 0.11%.

    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 puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance PhD to sort through and analyze all of the available puts for your stocks and ETFs, scanning for the optimal ones.

    **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. The 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: GOOG
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