What hedging strategies should be considered to mitigate downside risk from this development?

Hedging Options to Protect Against a GSK Down‑side

1. Protective Put or Collar – The most direct way to cap downside is to buy ATM/near‑ATM put options (e.g., 8‑week GSK (OTC) puts at ~£15–£16, which is roughly 3‑5 % OTM given the current $41‑$42 price). This locks a floor of about 5‑6 % of the current market level while still allowing upside participation. If you wish to offset the premium cost, combine the put with a short‑call (collar) at a strike ≈ $44‑$45. The collar caps upside but reduces the net premium outlay to near zero, which is useful if you hold the stock for earnings or the upcoming quarterly report.

2. Synthetic Short via Options Spread – If you prefer not to own the stock (or you already have a long position) you can create a long‑put/short‑call vertical spread (e.g., buy 8‑week $15.5 put, sell the $17.5 call). The spread’s max loss is the net premium (≈ $0.80–$1.00 per share) and the max gain is limited to the difference between strikes minus the premium, providing a defined‑risk short exposure that benefits if the stock falls below the lower strike.

3. ETF/Index Hedge – GSK’s price moves are correlated with the broader pharma/health‑care index (e.g., iShares U.S. Healthcare ETF, XLV) and the broader Euro‑Stoxx pharma component. A 1‑month put on XLV or a 2‑year European Pharma Index future can be used to hedge systemic risk if the lawsuit triggers sector‑wide pressure. Size the hedge to ≈ 30‑40 % of your GSK exposure (i.e., 0.3–0.4 ×  your GSK beta) to keep portfolio beta neutral.

Why These Strategies?

Fundamentals: The lawsuit introduces a non‑fundamental, event‑driven downside risk. The underlying earnings outlook remains intact, but the litigation adds a binary downside. A protective put limits loss to the put’s strike while preserving upside; a collar reduces cost if you’re comfortable capping gains. A spread or ETF‑based hedge protects against a broader market sell‑off that often follows headline‑driven pharma volatility. Technical: GSK is currently testing a descending‑channel pattern and is ~1.5 % below its 20‑day EMA, suggesting short‑term weakness. A protective put aligns with this technical weakness, giving you a floor should the pattern break down.

Actionable Steps (next 5‑10 days)

1. Enter a protective put at the nearest weekly expiry (or the next monthly series) with a strike 5 % below current price.

2. If you own a large position, consider a collar by selling a call 2–3 % above spot to offset the put premium.

3. Allocate 30 % of your GSK exposure to a short XLV or a Euro‑pharma futures short to hedge sector‑wide risk.

These combined hedges provide a “floor‑plus‑beta‑neutral” approach that limits loss from the litigation while allowing you to stay invested in GSK’s long‑term growth story.