Vintage Coca-Cola ads, via Envisioning The American Dream.
A secured portfolio around a Coca-Cola position
In August, I wrote about the performance of a collision-proof or secured portfolio built around a position in AT&T (T) in 2017 and presented a new one, which completed in February ( each portfolio lasts for six months). After that, I began presenting secured portfolios built around other supposed conservative stocks, including Coca-Cola (KO), in November. Let's see how the portfolio is finished at the end of six months. First, a reminder of how the portfolio was constructed and what it consisted of.
Construction of KO Hedged Portfolio in October
We used the Hedged Portfolio Method to build a concentrated portfolio around Coca-Cola in October starting with these premises:
- You had $ 200,000 to invest.
- You were unwilling to risk a decline of more than 14% over the next six months, so you wanted to be secured against something lower than that.
- You wanted to invest in a handful of names, including Coca-Cola, with the goal of maximizing your expected total return net of hedging costs.
Here is a mention of the steps involved, if you want to do this manually.
Step 1: Calculating Potential Returns
The goal of this step was to find names that had the potential to generate high total returns to include with Coca-Cola. Our Website, Portfolio Armor, calculates its own potential return by analyzing adjusted price history (which takes into account dividends) and election market sentiment, but you could have derived from Wall Street prizes or the price targets given by the Seeking Alpha contributors you followed. Your original universe could have been as large as Portfolio Armor (the ~ 4,500 shares and Exchange-Traded Products with options traded on them in the United States), or slightly less, such as Dow 30.
Step 2: Calculation of hedging costs
Since you were going to secure yourself, gross potential returns would have been less important to you than potential returns without the cost of hedging. To find out these, you would need to find out the optimal or least expensive way to nest each name. We wrote about how to find optimal fuses here. For this example, you would have looked for the cost of hedging against a 14% or higher decline. The lower the decline you easily hack against, the narrower the list of names you could have used.
Step 3: Ranking of Online Potential Returns Name
For each of the names in your original universe that had a positive potential return, you would have deducted the hedge price you calculated in step 2 to get a net potential return.
Step 4: Buying and Securing
Here you would only have bought and secured a handful of names that had the highest potential return net of hedging costs. The automated approach shown below contained a fine-tuning step to minimize cash, and another to determine whether it should be secured by putts or collars, but the four steps were the basics.
Coca-Cola Hedged Portfolio in November
Using the process outlined above, this was what Portfolio Armor's automated secured portfolio building tool presented to us: