HEDGING POSITION 1
After our equities team presented their picks for the stocks in the healthcare and pharmaceutical sector, it was up to our derivatives team to create a risk management strategy for our portfolio which is comprised of Pfizer, Cigna and BioNTech.
The team considered global macroeconomic events such as the escalation in Israel and Palestine and the rising interest rates, as well as the pharmaceutical market itself which is defensive and in some aspects countercyclical.
The detailed hedge proposal was centered around a 75% exposure to Pfizer (PFE), reflecting the main focus of the hedging effort due to its significant weight in the portfolio. The team chose to use the Health Care Select Sector SPDR Fund (XLV) as a benchmark for industry exposure.
The specific hedge construction was a collar, as follows:
Leg 1: Long put options on PFE with a strike price of $27.5, representing 20% of the position size to protect against stock-specific risks.
Leg 2: Long put options on IHE with a strike price of $170, again covering 20% of the position size for broader industry hedge.
Leg 3: Short call options on PFE with strike prices of $37.5/$39 covering the entire position value, funding the previous two positions.
The strategy aimed to be volatility neutral or selling, which would allow for higher protection levels and provide absolute downside protection below the put strikes. The proposed collar strategy also detailed the potential maximum loss and gain, premium gains or expenses, and days to expiration (DTE) for the options involved. The team recommended this approach for its balance of risk management and cost efficiency, demonstrating a sophisticated understanding of market dynamics and risk mitigation tactics.
If you want to learn more about the specific behind this strategy, check out our presentation.
DISCLAIMER: This is not financial advice, but only our personal opinion, King's Capital will not be held liable for any gains made/losses incurred by following this information. King's Capital does not have any real capital allocated, using paper trading instead.
