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A significant number of investors fail to hedge their portfolios for two reasons: They are unaware of hedging strategies or they implement them poorly. Hedging is a very important strategy that can help increase returns in one's portfolio offering income and protection during market corrections. For example, if you had purchased Netflix on the day of its earnings release last week, you would have seen a 10 per cent hair cut on your share price. However, I made the same purchase and hedged fully and have made gains on the trade. Here's how.
Before I provide you with the trade details, readers must know that my strategy on Netflix is an income generating strategy and not of capital appreciation and therefore the strategy outlined ahead may not be suitable for all investors. My intentions on buying Netflix is to collect the premiums on covered calls while ignoring the daily and weekly oscillations in the stock price. This way of thinking mimics a home owner renting their property to a family as the value of the monthly rent trumps the value of the home. The value of a home could rise or fall, but the rental income is the primary focus on the investment. With that said, here's how I've made money on a losing trade.
Shares of Netflix were purchased for $99.39 a share. Immediately, a married put strategy was implemented selling the July 22 103 call for $3.30 a contract. We also purchased a July 22 95 put for $2.93. As you can see, the premiums received on the calls offset the cost of the put option. The paired trade automatically generated income of $37 a contract regardless of where the stock finished for the week. This represents 0.37 per cent income on investment. The set up above meant that I would be forced to sell my shares at $103 if the stock rose above on Friday. However, if the stock fell below $95, I would have the option to sell at $95. My max profit on the stock was $3.61 a share and my maximum loss was $4.39 a share.
With the shares having fallen to around $86 on the stock's earnings report, the put option was sold for $9.80 instead of selling the stock at $95 because I wanted to continue owning the shares and reduce commission costs. The call option was worthless and we collected the entire $2.93. With the shares below the Bollinger Bands, we knew a rise was imminent, and on Tuesday July 26, the shares rose back above $90. We sold the July 29 93 call for $0.65.
If you add up all the transactions, the net money collected through all options was $10.82 (sale of call and put options minus the cost of the put option) a share dropping our break-even to below $90. If we are forced to sell the shares at $93 before the end of the week, we will have actually made $4.43 a share even though we sold it for $6.39 below our purchase price, as we see in the table below.
| Asset Name | Cost Price | Sale Amount |
| Netflix stock | 99.39 | 93.00 |
| Jul 22 103 call | 0.00 | 3.30 |
| Jul 22 95 put | 2.93 | 9.80 |
| Jul 29 93 call | 0.00 | 0.65 |
| Total | 102.32 | 106.75 |
I have removed commission costs in the examples above, however, with commissions below $5, they're essentially negligible in this example. If you have comments or questions on hedging strategies, leave us a message or follow my Facebook trading page Moonlight Financial Education.
Disclaimer: I am currently long Netflix shares and short Netflix call options.
The Pokemon Go app is believed to be generating a million dollars US a day, which puts it on par with top mobile games, such as Candy Crush and Clash of Clans. It's probably too late to buy Nintendo's (JP:7974, US:NTDOY) stock, which trades on the pink sheets in the US and the main exchange in Tokyo, with its significant climb this month, but there are still opportunities to make profits on this craze.
The release of the game occurred in the the third quarter (or second half for European readers) of the calendar in the US and Australia first, which means most earnings reports due this season will not include revenue related to the game. In fact, the game has not yet released in Japan, strangely. With that said, there are at least three industries that may see a pop in Q3 earnings and here's your chance to take advantage.
Telecommunication
Telecom stocks are poised for an earnings surprise in October and probably the biggest beneficiary. Data and roaming revenue will undoubtedly be fractionally higher. Most national carriers refrain from offering unlimited data and summer typically brings new contracts. Customers and parents dishing out the bill may be asked to offer or bundle better data plans. Canadian dollar investors may want to look at Rogers Communications (CA:RCI.B, US:RCI), Telus (CA:T), and BCE (CA:BCE, US:BCE) on the Toronto Stock Exchange. An added benefit: these companies offer attractive dividend yields and have a history of raising dividends every four to six quarters. Even if you end up stuck with these trades, they may turn into great investments for one's portfolio. If you want to stick with American telecommunication companies, consider Dow components Verizon (US:VZ) and AT&T (US:T). Both companies also offer generous dividends.
Historically, telecommunications also outperform the broader market during times of low or negative economic growth as investors seek safety and yield. Sales of battery charging units and portable kits are also expected to rise which boosts profit for companies like Best Buy (US:BBY) and many other electronic companies.
Cellphone Manufacturers
The second industry that will be a beneficiary of this Pokemon craze would have to be phone companies. Software updates on older phones typically stop after a while. The Samsung S3, for example, is unable to play the game, although there are ways around that do allow tech savvy users to catch em all. However, for thr general population, this game may be the catalyst that pushes customers to upgrade their phones which may also offer better battery life and faster game play. Apple (US:AAPL), Google/Alphabet (US:GOOGL), and Samsung (KR:005930) should see some sales boost in the third quarter. These companies also offer phone charging units as sales for these products have seen a jump.
Utilities
Thirdly, one could argue utility stocks could see a boost in demand for power. Charging phones three times or more should provide a small revenue boost. This is also another industry that outperforms during periods of slow economic growth; any boost in power consumption could offer yield hunters some capital appreciation. Transalta (CA:TA) in Canada is a major player and there are nearly a dozen US companies worth over $10 billion in market cap. The top three American stocks in market cap as of 2016 are Duke Energy (US:DUK), NextEra Energy (US:NEE), and Southern Co. (US:SO). If you're looking for a boarder based play, the iShares US Utility Index (US:IDU) offers exposure to an abundance of energy stocks in America.
It must be noted that these companies have not yet released second quarter earnings and if guidance for the third quarter is provided which discusses increased revenue from Pokemon Go, the trade may yield smaller returns. The US stock market is currently at a record high and it is important to be aware that most analysts are bearish at this point. If you are looking for an inexpensive way to play these trades, call option spreads may be a more efficient alternative. Good luck and happy trading.
Disclaimer: At the time of this article, I did not own any stocks or derivatives on the companies mentioned. Household owns BCE.
