Overcoming A 44%+ Drop In A Top Stock
We've done well with Super Micro Computer (SMCI) recently, buying it at $21.86 last month ("Turning Bullish On Supermicro"), and seeing the stock more than double since.
But SMCI was in some of our hedged portfolios six months ago, and it dropped more than 44% over that time frame.
Here's a look at one of those portfolios, and how hedging and security selection enabled it to still smoke the S&P 500.
Our Hedged Portfolio From June 6th, 2024
This was the hedged portfolio our system created on June 6th, for an investor with $3,000,000 to put to work who didn't want to risk a decline of more than 30% over the next six months. Our system started by dividing the money in seven equal parts, and allocating it to Abercrombie & Fitch Co. (ANF), Century Aluminum Co. (CENX) Dell Technologies (DELL), Comfort Systems USA, Inc. (FIX), Powell Industries, Inc. (POWL), and Semtech Corp. (SMTC), in addition to Super Micro Computer Inc. (SMCI).
Screen captures via Portfolio Armor on 6/6/2024.
Next, it rounded down those seven dollar amounts to round lots of each of those names and their optimal hedges. Then it swept most of the leftover cash from that process into a tightly collared position in MicroStrategy, Inc. (MSTR).
The dollar amount of the SMCI position (circled in red in the image above) at the start was $233,376 in underlying shares and $21,900 in puts for a total position value of $255,276. We'll come back to that in a moment.
How That Portfolio Performed Over The Next 6 Months
Over the next six months, our portfolio was up 30.52%, net of hedging and trading costs, while the SPDR S&P 500 Trust (SPY) was up 14.4%. So it more than doubled the performance of the market, despite SMCI dropping 44%.
You can view an interactive version of the chart above here.
You can see the ending value for the $SMCI plus its put hedge circled in red above: $202,155.30. Recall that the starting value for that position was $255,276. $202,155.30 represents a 20.8% drop from $255,276.
How This Portfolio Beat The Market Despite SMCI's 44% Drop
We mentioned two reasons above: hedging and security selection. Both are true, but there's a bit more to it.
- Although SMCI dropped by 44%--and its hedge was designed to protect against a >30% drop--it nevertheless limited the drawdown to 20.8%. That was due to the positive hedging error inherent in our hedging algorithm.
- Security selection helped overall here in picking mostly winners. POWL, for example, was up more than 73% over that six-month period.
- Concentration helped here too. Since there were only 8 underlying securities in the portfolio, the 73% gain in POWL had a big impact.
- Finally, knowing when to hedge with optimal puts rather than optimal collars was key. Our system has an algorithm to determine that, and since it hedged POWL with puts, we captured nearly all of its upside.
You can use our system to create hedged portfolios for dollar amounts as small as $30,000--you just need to enter the dollar amount you want to invest and largest drawdown you're willing to risk, and our system does the rest.
If You Just Want To Hedge What You Already Have
If you are concerned about downside risk, as a reminder, you can download our iPhone hedging app by aiming your iPhone camera at the QR code below (or by tapping here, if you're reading this on your phone).
And if you would like a heads up next time we place an aggressive trade, like our recent winner on QIFU Technologies ( QFIN 2.17%↑).
- Calls on QIFU Technologies ( QFIN 2.17%↑). Bought at $2.15 on 10/1/2024; sold (half) at $6.45 on 12/9/2024. Profit: 200%.
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If you'd like to stay in touch
You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on X here, or become a free subscriber to our trading Substack using the link below (we're using that for our occasional emails now).
