4. Platinum Collar
(See Random Walk’s text PLATINUM)
This is a Random Walk proprietary strategy that attempts to outperform the collar, married put or covered call strategy. Taking the process to a slightly more advanced level yields remarkable results.
By substituting the long put with a put butterfly spread, a trader can get right up to the current stock price with his hedge. This powerful adjustment avoids the pitfalls of purchasing an out-of-the-money put which allows for large amounts of slippage in the stock, while avoiding the high cost of purchasing an at-the-money option for a safer trade.
This blend is not very complex, but a little study is needed in order for a trader to strategically trade the appropriate strike prices. When done statistically correct, the resulting position can be a thing of beauty, and at the same time provide adequate protection for almost any normal stock movement.
A glance at the graph below shows how, with Random Walk’s Platinum Hedge, the position makes more money than a collar on a move higher. In addition, the stock can fall (in this example) over $7 without incurring a loss. Suppose stock movement was like a coin flip where each toss resulted in the stock either moving up or down $5. With the Platinum hedge a move higher by $5 results in a $6.17 profit (more than would have been gained by simple long stock), and move lower by $5 results in a $1.17 profit (where the shares would lose -$5).
Closing Analysis
We have examined 4 different methods for hedging a long stock, though there are countless more strategies available for a trader to custom tailor his risk preferences. For those who have many stocks in an account, a possibly better approach would be to group all the stocks together as your own personal “fund” and hedge with an appropriate index. By hedging a basket of stocks with an index, the costs can be diminished substantially with little additional statistical risk (depending on the diversity of your stock holdings). If you have questions or would like more information about any of these (or other) hedging techniques, please feel free to contact Random Walk Trading via email or toll free telephone at 1-(855)-RWT-0008.