August 8th, 2023
Laddered Hedge Wins Big!
With earnings season for the S&P 500 winding down, we’re learning that roughly 79% of companies have beat earnings, which is higher than the 10-year average of 73%. But this quarter has been a little different. The average company reporting positive surprises during this earnings season is seeing their stock drop 0.5% during the period covering the two days before and after the report. Over the last five years, the average change for a company’s stock over this period has been a 1% gain on positive numbers.
That’s important to remember when Disney takes center stage this week. It’s a good thing John Hutchinson wrote a few weeks ago about how to utilize a put ladder to hedge your portfolio.
Let’s check in and see how that is going.
Disney (DIS) is a mainstay in several indices and ETFs that are widely traded, so its earnings report will likely push the market in one direction or another.
This quarter they find themselves in the middle of controversy, and I’m not talking about their war with a presidential hopeful. Disney CEO, Bob Iger, has called out the demands of the striking writers and actors as ‘unrealistic’ as if asking for fair wages and standing up against studios using AI to mimic someone’s likeness in perpetuity is unrealistic. Either way, the strike is likely to hit Disney’s bottom line as new content dries up without writers or actors.
Will Iger talk about his desire to sell off some, if not all, of the company? Will Apple (APPL) eventually walk away with part of the company?
While Disney is finding a level of support around $86, the rest of the market seems to be on fragile ground as any piece of negative news can turn the market on its head, like last week’s story about a potential hack within the healthcare industry.
With the Volatility Index so low, buying puts to hedge your portfolio has gotten incredibly cheap. In this newsletter, John wrote about several different put options you could use to ladder into a hedged position.
While the S&P 500 ETF, SPY, was trading around $455, he mentioned the 25 AUG 460/450 put debit spread ($3.66), the 25 AUG 450/440 put debit spread ($1.57), the 15 SEP 440/435 put debit spread ($0.59), and the 15 SEP 435/430 put debit spread ($0.46).
By the time last weekend rolled around, the SPY was trading at $446. The total cost of the ladder was $6.28, and about a week later, it was worth $12.03, nearly a 100% gain!
If you missed his articles about the subject, they are worth a second look, especially as the top-heavy market is heading into a historically weak two months.
If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008
Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab
Any trade or trade idea discussed is for educational purposes only. They will not be tracked as an official trade recommendation.