With Netflix Riding High, 2 Ways To Hedge
1) Hedging With Optimal Puts
High cost, but uncapped upside.
This is the optimal put*, as of Monday's close, to hedge 100 shares of NFLX against a greater-than-20% drop between now and December 20th.
As you can see at the bottom of the screen capture below, the cost of this protection, as a percentage of position value, was 12.91%.
2) Hedging With A Negative Cost Optimal Collar
Pays you to hedge. 20% upside cap.
If you're willing to cap your potential upside at 20% between now and December 20th, this is the optimal collar to hedge 100 shares of NFLX 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 was negative, meaning you would have gotten paid to hedge in this case.
Possibly More Protection Than Promised
*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.