27% profit every 20 days?
This is what Nic Chahine averages with his option buys. Not selling covered calls or spreads… BUYING options. Most traders don’t even have a winning percentage of 27% buying options. He has an 83% win rate. Here’s how he does it.
Shares of Whole Foods (NASDAQ: WFM) hit a new 52-week high on Thursday, closing at $63.40, well above analysts' consensus 12-month price target of $61. For investors looking to add downside protection with the stock trading above its price target, here is a way to get paid to hedge.
Hedging With An Optimal Collar
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Below is the optimal collar*, as of Thursday's close, to hedge 1000 shares of WFM against greater-than-13% drop between now and March 21st, for an investor willing to cap his potential upside at 10% over the same time frame. Before we look at it, let me anticipate a question:
Why Would I Want To Cap My Upside At 10% For 6 Months?
Well, you might not. In which case, you could pay to hedge, or just take your chances and hope the stock doesn't have a big correction over the next several months. On the other hand, you might be willing to cap your upside here in return for getting paid to add downside protection, considering that you're up nearly 40% if you've held this stock all year. In that case, here's that optimal collar:
As you can see at the bottom of the screen capture below, 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 $300 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).
*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.
27% profit every 20 days?
This is what Nic Chahine averages with his option buys. Not selling covered calls or spreads… BUYING options. Most traders don’t even have a winning percentage of 27% buying options. He has an 83% win rate. Here’s how he does it.