Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

A Click, Please?

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No, no, this late-night plea isn't for you to click on an ad (although that never hurts). There's a new directory of financial blogs out there, and Slope is already #3 on its recommended list.

If you like Slope, could you go to this site and simply click the "Vote" link? You don't have to register or anything. You just click to vote. I've put an arrow pointing to it, although the words have changed already here:



By the way, I just finished reading my proof copy of Slope of Hope Bathroom Reader, and it's pretty cool. I'll be announcing it in the next week or two.

POTW: Internet Abbreviations

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The Peeve Of The Week (POTW) is an occasional feature on Slope which allows me to (a) gripe about something which bugs me, whether justified or not (b) put up a post when there's nothing in particular I want to say about the market. In spite of its moniker, the POTW may or may not shown up weekly. In any event, here's a new entry:

As I am inclined to mention from time to time, I've been online a very long time. I got my first modem in 1981 and have never really been offline since then. Just to drive the point to the obnoxious level, I wrote my first book – when I was all of 16 years old – about how computer communications would change the world (it was called, appropriately, The World Connection).

Given this background, I feel I have some say-so in the following matter: I cannot stand how people use initials and acronyms as a shorthand of sorts on the Internet in a desperate attempt to look cool. You know what I'm talking about – stuff like LOL, IMHO, ROFL, and so forth. Even as a youngster, I thought such things were ridiculous, but now – decades later – I find them strangle-worthy.

Let me let you in on a little secret…..if you find yourself using "U" for you, "R" for are, "LOL" for laughing out loud, etc. you are not demonstrating yourself to be a cool person. On the contrary, you are trumpeting to the world that you are a lame wannabe and, in all likelihood, an incurable putz. Please don't do this. Use normal English. The world will love you a little better for it.



Hedging Update — Stocks

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The Chicago Board Options Exchange Market Volatility Index (VIX) ticked up 1.2% Tuesday to close at 16.06. The table below shows the costs, as of Tuesday's close, of hedging 19 of the 20 of the most actively-traded stocks against greater-than-20% declines over the next several months, using the optimal puts for that.


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 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 (there's an example of this, with screenshots, in this article about hedging against a US default with optimal puts on TLT).

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 LVLT

In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with Level 3 Communications (LVLT). As of Friday, the cost of protecting against a greater-than-20% decline in that stock over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for it.

Hedging Costs as of Tuesday's close

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



Cost of Protection (as % of position value)

  Comparison Index ETFs  


SPDR S&P 500


DIA SPDR Dow Jones Industrial Avg 1.22%**
QQQ PowerShares QQQ Trust 1.98%**
  NYSE Stocks  
MI New M&I Corporation 5.06%**
BAC Bank of America Corporation 5.91%**
ACN Accenture, plc 2.35%**
F Ford 4.68%**
GE General Electric Company 2.68%**
C Citigroup Inc. 3.43%**
S Sprint Nextel Corporation 8.35%**
PFE Pfizer Inc. 2.31%**
WFC Wells Fargo & Co. 3.55%**
JPM JP Morgan Chase & Co. 3.27%**
  Nasdaq Stocks  
SIRI Sirius XM Radio Inc. 11.0%**
CSCO Cisco Systems, Inc. 3.89%**
MSFT Microsoft Corporation 2.57%**
MU Micron Technologies 12.1%**
INTC Intel Corporation 2.67%**
LVLT Level 3 Communications, Inc. No Optimal Puts At This Threshold
BLUD Immucor, Inc. 0.37%*
ORCL Oracle Corp. 3.12%**
YHOO Yahoo! Inc. 5.55%**
DELL Dell Inc. 4.35%**

*Based on optimal puts expiring in December, 2011.

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