Shares of Cheniere Energy (NYSEMKT:LNG) have been on a tear over the last year, rising more than 180%, despite losing $2.15 per share over the same time frame. The stock's win streak continued on Friday, when it hit another 52-week high intraday. For investors looking to lock in some gains and add downside protection, here are two ways to hedge.
1) Hedging With Optimal Puts
High cost. Uncapped upside.
These were the optimal puts*, as of intraday Friday, to hedge 1000 shares of LNG against a greater-than-15% drop between now and June 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 pretty high at 10.1%. Nevertheless, some LNG longs who are up more than 180% over the last 52-weeks may consider it.
2) Hedging With An Optimal Collar
Pays you to hedge. 15% upside cap.
If you were willing to cap your potential upside at 15% between now and June 20th, this was the optimal collar** to hedge 1000 shares of LNG against a greater-than-15% 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 an investor would be getting paid to open this collar.
Note that, to be conservative, Portfolio Armor calculated the cost of this hedge by using the bid price of the call leg and the ask price of the put leg. In practice, you can often sell calls for more (at some price between the bid and ask) and buy puts for less (again, at some price between the bid and ask), so, in actuality, an investor opening the optimal collar above may have been paid more than $40 to do so.
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.