Risk – Page 128 – Slope of Hope with Tim Knight

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Hedging Update — ETFs

By Dpinsen - 15 years ago (30, Jun 2011 1:02:50 PM)

The Chicago Board Options Exchange Market Volatility Index (VIX) dropped 9.91% Wednesday, to close at 17.27. The table below shows the costs, as of Wednesday's close, of hedging 18 of the 20 most actively-traded ETFs against greater-than-20% declines over the next several months, using the optimal puts for that. First, a reminder about why I've used 20% as a decline threshold, what optimal puts mean in this context, and a quick note about why there were no optimal puts for 2 of these ETFs.

Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available on the web, and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own, and the maximum decline you're willing to risk (your threshold). Then the app uses an algorithm developed by a finance academic to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes, as I've mentioned before, from a comment fund manager John Hussman made in a market commentary in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Essentially, 20% is a large enough threshold that it reduces the cost of hedging but not so large that it precludes a recovery. When hedging, cost is always a concern, which is where optimal puts come in.

How Costs Are Calculated

To be conservative, Portfolio Armor calculated the costs below based on the ask prices of the optimal put options. In practice, though, an investor may be able to buy some of these put options for less (i.e., at a price between the bid and the ask).

Why There Were No Optimal Puts for VXX and TZA

In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with iPath S&P 500 VIX Short-Term (VXX) and the Direxion Daily Small Cap Bear 3X (TZA). As of Wednesday's close, the cost of protecting against greater-than-20% declines in those stocks over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for them.

Hedging costs as of Wednesday

The data in the table below is as of Wednesday's close. The ETFs are listed in order of trading volume Wednesday, with the most actively-traded name (SPY) at the top.

Symbol	Name	Cost of Protection (as % of position value)
SPY	SPDR S&P 500	1.17%*
XLF	Financial Select Sector SPDR	2.16%*
IWM	iShares Russell 2000 Index	2.23%*
QQQ	PowerShares QQQ	1.35%*
EEM	iShares MSCI Emerging Markets	2.42%*
EWJ	iShares MSCI Japan	1.74%*
VXX	iPath S&P 500 VIX Short-Term	No optimal puts at this threshold
EFA	iShares MSCI EAFE Index	2.18%*
FAS	Direxion Daily Financial Bull 3X	16.3%**
SLV	iShares Silver Trust	5.23%**
SDS	ProShares UltraShort S&P 500	2.95%*
VWO	Vanguard Emerging Markets	2.91%*
TZA	Direxion Daily Small Cap Bear 3x	No optimal puts at this threshold
XLE	Select Sector SPDR — Energy	1.97%*
FXI	iShares FTSE China 25 Index	2.17%**
XLI	Industrial Select Sector SPDR	1.66%*
USO	United States Oil	3.25%**
SSO	ProShares Ultra S&P 500	7.51%*
SMH	Semiconductor HOLDRs	4.22%**
XLB	Materials Select Sector SPDR	2.06%*

*Based on optimal puts expiring in December, 2011.

**Based on optimal puts expiring in January, 2012.

Hedging Update — Stocks

By Dpinsen - 15 years ago (27, Jun 2011 8:59:02 PM)

The Chicago Board Options Exchange Market Volatility Index (VIX) declined 2.56% Monday to close at 20.56. The table below shows the costs, as of Monday's close, of hedging 20 of the most actively-traded stocks against greater-than-20% declines over the next several months, using the optimal puts for that.

Comparisons

For comparison purposes, I've also added the costs of hedging the SPDR S&P 500 Trust ETF (SPY), the SPDR Dow Jones Industrial Average ETF (DIA) and the Nasdaq 100-tracking ETF PowerShares QQQ Trust ETF (QQQ) against the similar declines. First, a reminder about what optimal puts mean in this context and why I've used 20% as a decline threshold.

Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available in Seeking Alpha's Investing Tools Store and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own and the maximum decline you're willing to risk (your threshold). Then the app uses an algorithm developed by a finance academic to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

How Costs Are Calculated

Hedging Costs as of Monday's close

The data in the table below is as of Monday's close. After the three ETFs listed for comparison purposes, the NYSE stocks are listed in order of their share volume in Monday's trading, with the most actively traded stock (BAC) listed first; the Nasdaq stocks are listed in a similar order, with the most actively traded Nasda stock (MSFT) listed first.

Symbol	Name	Cost of Protection (as % of position value)
	Comparison Index ETFs
SPY	SPDR S&P 500	1.42%*
DIA	SPDR Dow Jones Industrial Avg	1.17%*
QQQ	PowerShares QQQ Trust	1.74%*
	NYSE Stocks
BAC	Bank of America Corporation	7.28%**
F	Ford	4.83%*
S	Sprint Nextel Corporation	6.60%**
GE	General Electric Company	3.12%*
PFE	Pfizer Inc.	2.43%*
JPM	JP Morgan Chase & Co.	3.86%*
WFC	Wells Fargo & Co.	5.25%**
NOK	Nokia Corporation	13.9%**
C	Citigroup Inc.	3.90%*
	Nasdaq Stocks
MSFT	Microsoft Corporation	2.62%**
CSCO	Cisco Systems, Inc.	6.11%**
INTC	Intel Corporation	4.45%**
MU	Micron Technologies	15.9%**
ORCL	Oracle Corp.	3.29%*
NVDA	NVIDIA Corporation	8.83%*
DELL	Dell Inc.	5.27%**
ALU	Alcatel-Lucent	11.5%*
RIMM	Research in Motion, Ltd	12.73%*
CMCSA	Comcast Corporation	4.00%**

*Based on optimal puts expiring in December, 2011.

**Based on optimal puts expiring in January, 2012.

About That Last Hour

By Tim Knight - 15 years ago (23, Jun 2011 1:23:37 PM)

Well, today didn't turn out exactly as planned, eh? And for anyone out there who claims they saw the whole "Greece pop" coming…..errr, I don't think so. It was about as foreseeable as the silver crash back in early May. Sometimes something wild happens. If you were long and made money, congratulations. But let's recognize an element of chance was at play here.

For myself, a fairly fat profit turned into a small loss. Thank God for stop prices, because I was removed from a number of positions before the big pop. And – just to be clear that my bearishness wasn't all bluster – I want to note that I doubled the quantity of my short positions after the pop. There was one ETF, symbol SMH, that looked like a decent hedge, so I am long a large quantity of that (it is the ETF for semiconductors).

Let's take a quick look at the pop; here's what the Euro did:

Here's how the ES responded (note how it was starting to soften for the day before the news):

And – the most interesting chart for me – here's a daily candlestick of the miners:

Check out that red line I've drawn. That is the battleline, my friends. For the past three days, the GDX has had a huge range, and that line at about $54 has been the shoving delineator.

Of course, this whole Greece obsession has become a bit of a farce. One day there's a deal; the next, there isn't. To my way of thinking, I used the pop as an opportunity to get better prices.

But I have one closing thought, and that is in praise of the slow, plodding way I am forced to trade because of the large quantity of positions I'm in. If I were trading just, say, the SPY, I'd probably get chopped to pieces. Days like today can make mincemeat out of a person.

The way I trade, I am in a large quantity of individual positions, and I cannot flip from bull to bear (or vice versa) on a whim. Instead, the cumbersome nature of my portfolio's makeup – – its unwieldiness – – is actually a blessing. Each stock stands on its own merit, and each stock has its own customized stop. It helps remove some of the emotions and arbitrariness out of my own trading.

Of course, these individual positions are subject to the broad direction of the market. My point is that the nature of my portfolio helps foreclose me from being rash (which, as a human, I am prone to being from time to time). An explosive move like this afternoon's, which was a bolt from the blue, can trigger panic and unwise choices. I am happy that my positions simply have their stops in place and have to live and die on their own merits.

That'll be it from me today. I hope you guys survived – – and some of you, I imagine, had a surprisingly strong finish! – – and I'll be putting up posts from others over the course of the evening.

Hedging Update — ETFs (by Dave Pinsen)

By Dpinsen - 15 years ago (23, Jun 2011 9:50:56 AM)

The table below shows the costs, as of Wednesday's close, of hedging 19 of the 20 most actively-traded ETFs against greater-than-20% declines over the next several months, using the optimal puts for that. First, a reminder about why I've used 20% as a decline threshold, what optimal puts mean in this context, and a quick note about why there were no optimal puts for one of these ETFs.

Optimal Puts

Decline Thresholds

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

How Costs Are Calculated

Why There Were No Optimal Puts for VXX

In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with iPath S&P 500 VIX Short-Term (VXX). As of Wednesday's close, the cost of protecting against greater-than-20% declines in those stocks over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for them.

Hedging costs as of Wednesday

The data in the table below is as of Wednesday's close. The ETFs are listed in order of 125-day exponential moving average volume, with the most actively-traded name (SPY) at the top.

Symbol	Name	Cost of Protection (as % of position value)
SPY	SPDR S&P 500	1.37%*
XLF	Financial Select Sector SPDR	2.80%*
EEM	iShares MSCI Emerging Markets	2.52%*
IWM	iShares Russell 2000 Index	2.72%*
QQQ	PowerShares QQQ	1.59%*
SLV	iShares Silver Trust	6.62%**
EWJ	iShares MSCI Japan Index	2.48%*
SDS	ProShares UltraShort S&P 500	2.44%*
FAS	Direxion Daily Financial Bull 3X	16.9%**
XLE	Select Sector SPDR — Energy	2.34%*
VXX	iPath S&P 500 VIX Short-Term	No optimal puts at this threshold
VWO	Vanguard Emerging Markets	2.99%*
EFA	iShares MSCI EAFE Index	2.82%*
XLI	Industrial Select Sector SPDR	1.94%*
FXI	iShares FTSE China 25 Index	2.53%**
GLD	SPDR Gold Shares	0.38%*
USO	United States Oil	4.45%**
EWZ	iShares MSCI Brazil Index	2.90%*
XLB	Materials Select Sector SPDR	2.62%*
SSO	ProShares Ultra S&P 500	6.86%*

*Based on optimal puts expiring in December, 2011.

**Based on optimal puts expiring in January, 2012.

Hedging Update — Stocks

By Dpinsen - 15 years ago (20, Jun 2011 3:14:00 PM)

On Bloomberg TV Monday afternoon, markets reporter Adam Johnson noted that put protection had gotten more expensive since a week ago. That has been the case, as the the Chicago Board Options Exchange Market Volatility Index (VIX) has been above 20 since late last week. You can see examples of put protection getting more expensive in the table below, shows the costs, as of Monday afternoon, of hedging 20 of the most actively-traded stocks against greater-than-20% declines over the next several months, using the optimal puts for that.

Comparisons

Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available on the web and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own and the maximum decline you're willing to risk (your threshold). Then the app uses an algorithm developed by a finance academic to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

How Costs Are Calculated

Hedging Costs as of Intraday Monday

The data in the table below is as of Monday afternoon.

Symbol	Name	Cost of Protection (as % of position value)
SPY	SPDR S&P 500	1.49%*
DIA	SPDR Dow Jones Industrial Avg	1.26%*
QQQ	PowerShares QQQ Trust	1.90%**
	NYSE Stocks
BAC	Bank of America Corporation	8.18%**
F	Ford	3.77%*
AMD	Advanced Micro Devices, Inc.	19.4%**
GE	General Electric Company	3.19%*
WFC	Wells Fargo & Co.	6.03%**
NOK	Nokia Corporation	16.3%**
C	Citigroup Inc.	4.47%*
PFE	Pfizer Inc.	2.37%*
S	Sprint Nextel Corporation	11.2%**
ALU	Alcatel-Lucent	11.5%*
	Nasdaq Stocks
RIMM	Research in Motion, Ltd	12.7%*
CSCO	Cisco Systems, Inc.	6.01%**
MSFT	Microsoft Corporation	3.14%**
LVLT	Level 3 Communications, Inc.	11.6%*
INTC	Intel Corporation	4.74%**
YHOO	Yahoo! Inc.	8.34%**
MU	Micron Technology Inc.	12.6%**
AAPL	Apple, Inc.	3.90%**
ORCL	Oracle Corporation	3.35%*
NVDA	NVIDIA Corporation	8.56%*

*Based on optimal puts expiring in December, 2011.

**Based on optimal puts expiring in January, 2012.