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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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  • Downside Protection For Nasdaq OMX Group 0 comments
    Oct 23, 2013 4:15 PM | about stocks: NDAQ

    A 52-Week High For Nasdaq OMX Group

    Shares of Nasdaq OMX Group, Inc. (NASDAQ:NDAQ) hit a 52-week high intraday Wednesday, after the company reported better-than-expected 3rd quarter earnings. For NDAQ longs looking to limit their potential downside over the next several months without capping their potential upside, here is a way to hedge.

    Hedging With Optimal Puts

    1.13% cost, uncapped upside.

    These were the optimal puts*, as of Wednesday's close, to hedge 1000 shares of NDAQ against a greater-than-20% drop over the next several months.

    As you can see at the bottom of the screen capture below, the cost of this protection, as a percentage of position value, was 1.13%. Note that, to be conservative, the cost was calculated using the ask price of the optimal puts. In practice, an investor can often buy puts for less (i.e., some price between the bid and the ask).

    Possibly More Protection Than Promised

    In some cases, hedges such as the one above can provide more protection than promised. For an example of that, see this post about hedging shares of the SPDR Gold Trust ETF (NYSEARCA:GLD).

    *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 the available puts for your stocks and ETFs, scanning for the optimal ones.

    Stocks: NDAQ
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