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Adding Downside Protection To UPS

|Includes: United Parcel Service, Inc. (UPS)

A 52-Week High For UPS

Shares of UPS (NYSE:UPS) hit a 52-week high on Monday, after the company reported doubling its Q3 profit on a year-over-year basis (the company reported this after the close on Friday, and followed with an 8-k Monday). For UPS 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

0.62% cost, uncapped upside.

These were the optimal puts*, as of Monday's close, to hedge 1000 shares of UPS 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 0.62%. 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.