In Case We're Wrong About The New York Times
- President Trump has long appended the adjective "failing" to the New York Times, but the company is far from failing after its Q4 earnings beat.
- The New York Times is now trading near 13-year highs, and was a Portfolio Armor top ten name on Thursday.
- In the event my site ends up being wrong about it, I present two ways of hedging the stock. I also discuss how my site decides which hedge to use.
- Looking for more? I update all of my investing ideas and strategies to members of Bulletproof Investing. Get started today »
The New York Times building in New York City (Photo by Scott Eells/Bloomberg via Getty Images).
The New York Times: Far From Failing
Starting during his campaign, as exemplified by the tweet below, President Trump frequently derided The New York Times (NYSE:NYT) as "failing."
After NYT shares hit a 13-year high following the company's Q4 beat, critics on Twitter such as Eric Wishart, below, were quick to contrast its results with the President's characterization of the paper.
The New York Times was one of the top ten Portfolio Armor names I shared with subscribers on Thursday, but it's possible my site will end up being wrong about NYT. In the event it is, below are two ways shareholders can limit their risk. As a reminder: these hedges are for NYT bulls. If you're bearish on the stock, you shouldn't own it.
Downside Protection For The New York Times
For these two examples, I'm going to assume that you have 1,000 shares of NYT and can tolerate a 20% decline over the next several months, but not one larger than that. The screen captures below are via the Portfolio Armor iPhone app.
Uncapped Upside, Positive Cost
These were the optimal, or least expensive, put options to hedge 1,000 shares of NYT against a greater-than-20% decline by late July, as of Friday's close.
The cost of this protection was $750, or 2.39% of position value, calculated conservatively, using the ask price of the puts (in practice, you can often buy and sell options at some price between the bid and ask.
Capped Upside, Negative Cost
If you were willing to cap your possible upside at 17% over the same time frame, this was the optimal collar to give you the same level of downside protection.
One difference with this hedge is that, after an iterative process taking into account its net cost, the hedging algorithm determined it was able to use a less expensive strike for the put leg, one where the cost was $600, or 1.91% of position value (calculated conservatively at the ask, again). Another difference is that the cost of the put leg was more than offset by the income generated by selling the call leg: $7). Another difference is that the cost of the put leg was more than offset by the income generated by selling the call leg: $700, or 2.23% of position value (calculated conservatively, at the bid).
So the net cost of this hedge was negative, meaning you would have collected a net credit of $1. So the net cost of this hedge was negative, meaning you would have collected a net credit of $100 when opening it, assuming you placed both trades at the worst ends of their respective spreads.
Given the choice of the two hedges for NYT, which would you pick? That's up to your preference, but here's how Portfolio Armor would approach that question in a portfolio. It knows that, on average, positions hedged with puts have higher gross returns (i.e., not net of hedging costs), because of the incidence of outliers. Specifically, in our tests, securities hedged with puts had gross returns 1.93x those hedged with collars, on average.
So what the site would do is deduct the hedging cost in each case from its potential return estimate for NYT (about 25%), and then multiply the net potential return of the position hedged with puts by 1.93 and see if it's higher than the net potential return of the position hedged with an optimal collar. It is, when hedging against a >20% decline, so the site would use the optimal put hedge for NYT.
To be transparent and accountable, I post a performance update for my Bulletproof Investing service every week. Here's the latest one: Performance Update - Week 62.
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