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Downside Protection For Nasdaq OMX Group

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A 52-Week High For Nasdaq OMX Group

Shares of Nasdaq OMX Group, Inc. (NASDAQ: NDAQ) hit a 52-week high intraday Wednesday, after the company reported better-than-expected 3rd quarter earnings. For NDAQ longs looking to limit their potential downside over the next several months without capping their potential upside, here is a way to hedge.

Hedging With Optimal Puts

1.13% cost, uncapped upside.

These were the optimal puts*, as of Wednesday's close, to hedge 1000 shares of NDAQ against a greater-than-20% drop over the next several months.

As you can see at the bottom of the screen capture below, the cost of this protection, as a percentage of position value, was 1.13%. Note that, to be conservative, the cost was calculated using the ask price of the optimal puts. In practice, an investor can often buy puts for less (i.e., some price between the bid and the ask).

Possibly More Protection Than Promised

In some cases, hedges such as the one above can provide more protection than promised. For an example of that, see this post about hedging shares of the SPDR Gold Trust ETF (NYSE: GLD).

*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 the available puts for your stocks and ETFs, scanning for the optimal ones.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Options Markets Trading Ideas

 

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