A new subscriber to Portfolio Armor today asked a couple of good questions. I thought it might be helpful to others to address them here.
Q: Can I use Portfolio Armor to find a 12 month LEAP to hedge a position?
A: The all-but-dissertation finance Ph.D. candidate who designed the algorithm tested out different time periods first, and his research suggested that ~six months to maturity offered the best combination of liquidity and cost. I.e., the cost of hedging for ~six months, twice, was generally cheaper than the cost of hedging for ~a year, once. So the algorithm is set to find options that will expire in approximately six months, since this was determined to be the optimal time to maturity.
Q: What about long-term capital gains versus short-term capital gains?
A: I’m not a tax adviser, but I’d imagine that if your clients end up with a large gain on their hedges, they will have a loss on whatever they were hedging that will help offset it.
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