Ferrari (NYSE:RACE) Hedging Bets on This Aristocrat


The Big Q: Is Ferrari ready for a Pit Stop?

The Big A: Recently, Seeking Alpha contributor Taylor Dart argued that Ferrari (RACE) was “due for a pit stop.” Although Mr. Dart saw the possibility of Ferrari making new highs over the next 12 to 18 months, he wrote that the stock was “priced to perfection” above $136/share. Seeking Alpha Essential’s Quant rating on the stock seems to agree with Mr. Dart on that last point, giving it an “F” on valuation.

Currently, Ferrari (NYSE:RACE) is trading at: 148.48+3.62 (+2.50%) just off its 52 wk highs and it all time highs, as the stock looks over bought in here.

Screen capture via Seeking Alpha

Portfolio Armor, eschews valuation, and instead ranks securities both stocks and exchange traded products on total returns momentum and options market sentiment over the next several months.

It is Bullish Ferrari now, which was 1 of its Top 10 names Wednesday. That is consistent with Seeking Alpha’s quant rating, as the “A” and “A+” Ferrari gets for momentum and EPS revisions above.

Despite the Bullishness, it’s possible Ferrari shares will tumble due to an earnings miss later this year, or as part of a general market correction. For shareholders who want to stay long while limiting their Southside risk, below are a couple of ways of doing so.

Southside Protection For Ferrari

For these 2 examples, assume you have 1,000 shares of RACE and can tolerate a decline of as much as 20% over the next several months, but not one larger than that.

As a reminder hedging is for cautious Bulls, not Bears. If you are Bearish Ferrari now, you shouldn’t own it.

The screen captures below are via a TestFlight version of the Portfolio Armor iOS app.

Uncapped Northside, Positive Cost

As of Wednesday’s close, these were the optimal, or least expensive, put options to protect 1,000 shares of RACE against a 20% decline by mid-January.

The cost of this protection was $3,900, or 2.69% of position value, calculated conservatively, using the ask price of the puts

Note: Iin practice, you can often buy and sell options at some price between the bid and ask.

Attentive readers may have noticed that the last field in the screen capture above is annualized cost as a percentage of position size. The next version of this app will offer users the ability to choose different expiration dates for their hedges; that last field is a way to compare hedges of different duration on an equal footing.

Capped Northside, Negative Cost

If you were willing to cap your possible upside at 17%, this was the optimal collar, as of Wednesday’s close, to protect against the same, 20% decline by mid January.

This hedge uses a different strike for its put leg: After an iterative process taking into account the net cost of the collar, the hedging algorithm was able to use less expensive put options, ones where the cost was $2,800, or 1.93% of position value calculated conservatively, at the ask. The income generated by selling the call leg was higher though: $3,900, or 2.69% of position value calculated conservatively, at the bid.

So, the net cost here was negative, meaning you would have collected a net credit of $1,100 when opening this hedge, assuming you had placed both trades at the worst ends of their respective spreads.

Wrapping Up: Which Hedge?

If you are price sensitive, you would prefer the 2nd hedge, which has a net credit of $1,100, over the 1st hedge, which has a cost of $3,900. Portfolio Armor’s portfolio construction tool seeks to maximize returns rather than minimize cost, though, and it knows that, historically, securities hedged with optimal puts outperform those hedged with collars. So, in determining which hedge to use, it weighs the incidence of outliers that drive outperformance for positions hedged with optimal puts versus the lower hedging cost of the collar. In this particular case, it would have selected the optimal put hedge.

Ferrari is the Aristocrat of the automotive sector.

The iconic Italian Supercar manufacturer claimed the title according to the latest Brand Finance Global 500 2019 report launched at the World Economic Forum in Davos.

HeffX-LTN overall technical outlook for RACE is Bullish to Very Bullish, there is extremely light resistance now at 151.21, and strong support at 144.58, all of our Key indicators are Very Bullish in here.

Tune in and enjoy the F1 racing at Montreal this weekend, info you need is here.