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Hedging SPY

|Includes: SPDR S&P 500 Trust ETF (SPY)

For investors looking to take advantage of the current euphoria to buy some downside protection against the next significant correction, the screen capture below shows the optimal puts*, as of Tuesday's close, to hedge 1000 shares of the SPDR S&P 500 ETF (NYSEARCA:SPY) against a greater-than-20% drop between now and December 20th.

As you can see at the bottom of the screen capture above, the cost of this protection, as a percentage of position value, was 0.87%**.

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 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 all of the available puts for your stocks and ETFs, scanning for the optimal ones. The screen captures above are from the Portfolio Armor iOS app.

**Note that, to be conservative, Portfolio Armor calculates hedging cost based on the ask price of the optimal puts. In practice, an investor can often purchase puts for a lower price, i.e., some price between the bid and ask.