E Locking In RingCentral Gains

Avaya's Tweet Announcing Its Partnership With RingCentral On Thursday. 

Locking In Ring Central Gains

Shares of RingCentral (RNG) spiked a whopping 28% on Friday, after Avaya (AVYA) announced a strategic partnership between the two companies. For RingCentral shareholders who want to stay long, but lock in some of the recent gains in the event there's a near-term pull back, below are a couple of ways to do so. 

For these examples, I am assuming you own 1,000 shares of RNG and can tolerate a drawdown of up to 17%, but not one larger than that. Both of these hedges expire in November, so unlike in our recent example with AMD (AMD), I have circled each hedge's dollar cost to distinguish it from the cost as percentage of position value. The screen captures below are via the Portfolio Armor iPhone app. 

Uncapped Upside, Positive Cost.

As of Friday's close, these were the optimal, or least expensive, put options to hedge 1,000 shares of RNG against a >17% decline by mid-November. 

The cost of this protection was $3,000, or 1.84% of position value, calculated conservatively, using the ask price of the puts (Remember: in practice, you can often buy and sell options at some price between the bid and ask). That worked out to an annualized cost as a percentage of position value of 16.35%. 

Capped Upside, Negative Cost.

If you were willing to cap your possible upside at 10% by then, this was the optimal, or least expensive, collar to give you protection against the same, >17% decline by mid-November. 

Here the cost was negative, meaning you would have collected a net credit of $600, or 0.37% of position value, when opening this collar, assuming you placed both trades (buying the puts and selling the calls) at the worst ends of their respective spreads. That worked out to an annualized cost of -3.19% of position value. 

Wrapping Up

Readers can experiment with different expirations to see how the cost varies (in general, it will go up for optimal put hedges, but it sometimes it can go down for optimal collar hedges). For large enough positions, the app may also mention another form of protection that doesn't involve options. If readers would like to see different hedges on RNG, or on other names, I'm happy to take request in the comments. 

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Beating Buffett 1 year ago Member's comment

Good strategy on $RING.