Hedging First Solar After Its Post-Earnings Pop

Shares of First Solar Inc. FSLR were up more than 17% intraday Friday, after the company reported Q3 numbers on Thursday that beat consensus earnings and revenue estimates. For investors looking to add downside protection now, here are two ways to hedge.

1) Hedging With Optimal Puts

16.5% cost. Uncapped upside.

These were the optimal puts*, as of intraday Friday, to hedge 1000 shares of FSLR against a greater-than-20% drop between now and June 20th.

As you can see at the bottom of the screen capture below, the cost of this protection, as a percentage of position value, was quite expensive at 16.45%.

2) Hedging With An Optimal Collar

Pays you to hedge. 20% upside cap.

If you were willing to cap your potential upside at 20% between now and June 20th, this was the optimal collar** to hedge 1000 shares of FSLR 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 was negative, meaning an investor would get paid to open this 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 may have gotten paid more than $800 to hedge in this way.

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 JCP.

*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.