Insulating The Shock From Taser's Drop

Taser International TASR shares were down more than 5% intraday Friday, as news of the company's price cuts on its Axon cameras continued to weigh on the stock. Recall that we showed a way to hedge Taser in a post earlier this week ("A Shockingly Inexpensive Way To Hedge Taser International"). In today's post, we'll look at how that hedge has reacted so far to Taser's drop. 

The Inexpensive Taser Hedge

This was the optimal collar*, as of Tuesday's close, to hedge 1000 shares of TASR against a greater-than-20% drop over the next six months, for an investor willing to cap his upside at 19% over the same time frame:

As you can see at the bottom of the screen capture above, the net cost of that optimal collar was negative, meaning the investor would have gotten paid to hedge.

How That Hedge Has Reacted To TASR's Drop

Here is a quote on the call leg as of Friday afternoon:

And here is a quote on the call leg:

How That Hedge Has Cushioned TASR's Drop

TASR closed at $15.94 on Tuesday, October 1st, when we ran that hedge. A shareholder who owned 1000 shares of TASR and opened the collar above on October 1st had $15,940 in TASR stock plus an outlay of -$400 on the hedge, so $15,540 taking into account the hedge.

TASR traded at $14.01 intraday Friday, down 12% from its closing price on Tuesday, so the investor's shares were worth $14,010, his put options were worth $1,550, and if he wanted to close out the short call leg of his collar, it would cost him $1,230. So: ($14,010 + $1,550) - $1,230 = $14,330, which represents a 7.8% drop from $15,540.

More Protection Than Promised

So, although TASR had dropped by 12% at the time of the calculations above, and the investor's hedge was designed to limit him to a loss of no more than 20% (i.e., it wasn't designed to protect him against smaller declines), he was actually down less than 8% on his combined hedge + underlying stock position at this point.

Options Give You Options

If TASR continues to decline, price of the call leg of this collar will decline, and the price of the put leg will increase, providing a greater cushion for an investor looking to close out the hedge and sell his shares. Or, if a hedged investor is bullish on TASR despite the decline, he could buy-to-close the call leg of this collar, sell his appreciated put leg, and use the proceeds to buy more TASR shares. No need for a hasty decision though, since as long as the investor his hedged, his downside is limited.

*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.