Big Drop In The Bitcoin Stock We Bragged About

That sort of portfolio wouldn't include a stock like MSTR, because it's not possible to hedge it against a decline that small. So let's consider an aggressive portfolio that would have included it.

Here's an example, followed by an explanation. Let's say you had a few million dollars to put to work back on December 17th (the first date MSTR hit our top ten), and you were willing to tolerate a drop of 30% over six months, but not one larger than that. Here's what you could have inputted on our site then: 

This and subsequent screen captures via Portfolio Armor

This is the portfolio it would have presented to you.

With this, your maximum drawdown over the next six months - that is, if every underlying security went to zero - would be a decline of 29.71%. Your best-case scenario would be a gain of about 37%, and your expected return (a more likely scenario) would be a gain of about 16%.

Why These Stocks?

Our system selected Etsy (ETSY), MicroStrategy, Nvidia (NVDA), Peloton (PTON), Roku (ROKU), SolarEdge (SEDG), and Zoom (ZM) because they were among our top names - the ones that had the highest potential returns, net of hedging costs. It started with roughly equal dollar amounts of each, and then rounded them down to round lots, to reduce hedging costs. It swept up most of the leftover cash from the rounding-down process into a tightly hedged Tesla position, to further reduce hedging cost.

Why These Hedges?

On our website, if you click the plus signs in the portfolio above, the positions expand to give you a better look at the hedges. For example, this is what the MSTR position looked like expanded.

MSTR was hedged with an optimal, or least expensive, collar. Some of the other positions are hedged with optimal puts. Our system estimates returns both ways to determine which type of hedge is best. We elaborated on that process in a recent post: When To Hedge With Puts Versus Collars.

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