In a recent post ("Two Ways of Hedging Apple and Research In Motion"), we mentioned that Tim's bearish November post about Apple ("How Apple Became Japan") looked prescient. It looks even more prescient now after Apple's post-earnings tumble. In our post, we mentioned a few different hedges on Apple. Below is a quick update of how those hedges reacted as Apple dropped more than 12% on Thursday.
February Expiration Optimal Put
This was the optimal put* we first mentioned in an August 17th tweet. This was the optimal put to hedge against a greater-than-20% drop from Apple's share price at the time (about $648).
July Expiration Optimal Put
This was the optimal put we mentioned in our previous post on hedging AAPL, to hedge against a drop of greater-than-20% from Apple's price at the end of last week (about $500 per share).
July Expiration Optimal Collar Update
And, finally, this is an update on the optimal collar** we mentioned in that previous post. This one was designed to protect against a greater-than-20% drop from its then-current market price of about $500, while capping an investor's upside at 15%. This was a negative-cost collar, because the income from selling the calls more than offset the cost of buying the puts, so an investor opening that collar was effectively getting paid to hedge. Note that the call leg here has dropped in price, as expected. If our hypothetical investor turned bullish on Apple today, for some reason, he could buy back that call leg here for less than he sold it for, removing his upside cap.
*Optimal puts
are the ones that will give you the level of protection you
want at the lowest possible cost. Portfolio Armor (available on the web and as an Apple iOS app),
uses an algorithm developed by a finance Ph.D 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 extension to the
Portfolio Armor algorithm to find optimal collars was developed by a
post-doctoral fellow in the financial engineering department at
Princeton University.
