Market Overview

Downside Protection For Regeneron Pharmaceuticals

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Shares of Regeneron Pharmaceuticals (NASDAQ: REGN) closed up 4.2% on Thursday, to $288.83, after climbing over $294 intraday. The company had announced on Tuesday that it would release clinical trial data for its Macular Edema treatment EYLEA at the annual meeting of the American Academy of Ophthalmology next week. For investors looking to lock in some gains and add downside protection, here are two ways to hedge.

1) Hedging With Optimal Puts

Higher cost. Uncapped upside.

These were the optimal puts*, as of Thursday's close, to hedge 1000 shares of REGN against a greater-than-20% drop between now and May 16th.

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 9.28%. Nevertheless, some REGN longs who are up nearly 95% over the last 52-weeks may consider it.

2) Hedging With An Optimal Collar

Lower cost. 20% upside cap.

If you were willing to cap your potential upside at 20% between now and May 16th, this was the optimal collar** to hedge 1000 shares of REGN against a greater-than-20% drop over the same time frame.

As you can see at the bottom of the screen capture above, the net cost of this collar, as a percentage of position value, was 0.76%. Recall that we saw an even larger reduction in cost from hedging with an optimal collar in this post on Celldex Pharmaceuticals (NASDAQ: CLDX) recently.

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 paid less than 0.76% to do so.

Possibly More Protection Than Promised

In some cases, hedges such as the ones above can provide more protection than promised. For a recent example of that, see this post about hedging shares of Tesla Motors, Inc. (NASDAQ: TSLA).

*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.

 

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