Hedging Just Got a Little Cheaper

by Jay Pestrichelli on October 27th, 2011

Today, Thursday October 27th, the markets rallied on news out of Europe. The major indexes all gained over 3% and you could almost feel the sign of relief as investors kept the momentum of a sharply higher open going. For those of us that hedge, there is one other benefit to a rally like this... the drop in volatility.

Believe it or not, the VIX gap down open of 17% lower against Wednesday's close was the most interesting data point of the morning. As a reminder, lower volatility means less expensive options.

The table below shows cost of building an SPX hedge over the last week and a half.
Its easy to see that the cost of establishing a hedge today is lowest at 3.2%.

This looks at put options out 5 months to the March expiration at strikes that are approximately 10% below the current SPX (S&P 500 Index) market value.

One put contract with a strike 10% below the market @1150 will cover $115,000 worth of broad market value. While still relatively expensive compared to the past 24 mohtns, today's cost is some of the lowest since the volatility begain in August.

This might be a great time to consider using this as a portfolio put!

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