Locking In Some Lululemon Gains
Since shares of Lululemon Athletica (NASDAQ: LULU) bottomed at $61.33 on June 24th, the stock has climbed nearly 25%. For Lululemon shareholders wary about giving up all of those gains (and possibly more) in the event of a significant correction, here is a way you can get paid to hedge.
Hedging With An Optimal Collar
Below is the optimal collar*, as of Thursday afternoon, to hedge 1000 shares of LULU against a >18% drop between today and March 21st, for an investor willing to cap his potential upside at 17% over the same time frame.
As you can see at the bottom of the screen capture above, the net cost of this optimal collar was negative, meaning you would have gotten paid to hedge in this case.
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 would likely have netted more than $560 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 JC Penney (NYSE: JCP), “Softening The Blow For JC Penney Longs”.
*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. Portfolio Armor’s 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.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.