Skip to main content
No. of Recommendations: 0
If anyone out there is familiar with Jeffrey Cohen's book "Put Options" I hope they can help me with some math. It is regarding how many puts to buy and at what strike price and refers to pages 118 to 130.

I’ve been using a modified version of Cohen’s system for a bit with SAAS stocks culled from the universe of stocks discussed on Saul’s board. I have not been hedging much but really feel like I should become more conservative and hedge more. I've just tried to determine how much I should hedge according to Cohen if i followed his system religiously. I Hope someone can check my math here, and if you do thanks in advance.

The stocks in Saul's universe have such high volatility that I can establish the 10% (more realistically 12 - 15 %) premium per annum per trade Cohen proposes by selling puts that are +/- 25% OOTM puts with expiration 3-4 months out (I choose that exp date to take advantage of time decay).

Again my question is how to hedge. Let’s say the puts sold have a potential cost of $400,000. I’ve decided that the optionable etf ARKW (also (in this case unfortunately) a high volatility vehicle) will be my hedging vehicle. It is currently selling for say $160. In order to determine the strike price of the hedging puts that I will buy, I add the 25% (my sold puts are OOTM by this amount) to the 9% (.75 x 12% (see above) and buy protective puts at a strike price 34% less than the current price of ARKW which works out to about 105. My calculation is that I would then buy $400,000/($160 x 100 shares per put) = 25 contracts ARKW Sept 2021 105 puts. The price for this would be 25 x the current price of +/- 4.30 and would cost me $10750. This hedge would need to be done twice a year so the annual total would be $21500.

Given the premiums usually total 12 - 15% and annual hedging cost is close to 5%, it looks here like I’d get a return of 7 -10% in a just about fully hedged portfolio, with the caveat that a particular stock could behave very badly. I’d just like to ask, how is my math? Again, thanks in advance to anyone tries to help me here.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.