Cost of Hedging Weekly update 10-10

by Jay Pestrichelli on October 10th, 2012

After the last 3 trading days, we’ve seen hedging costs feel a notable increase. The short term (2-3 months) jumped from .80 bps per day on Friday by 40% to 1.14 bps per day yesterday. Mid-term costs (6-9 months) moved up 20% from an all time low of 1.17 bps per day to 1.40 yesterday.
Both of these data points, however are below the ranges we saw in early September but are ticking above the average over the last 20 days. As usual, you can see the daily data on the Buy and Hedge Resource Page.
Since June, we’ve seen a downward trend in the cost of hedging, but it is starting to feel like that trend may reverse. With the Apple (AAPL) touching bearish territory yesterday and Europe continuing to drive market news, there are some that remind us that October 9th 2007 was the top of the market. Yesterday’s 5-year anniversary of that mark is spooking some investors as the superstitious may be bracing for the beginning of the bear market.
But if you’re bullish over the long term for the US economy and the “Fed-Supported” financial markets, earnings season is going to need to do its part and deliver some decent results if you want to push through the election to end the year higher from here. A 5% sell off shouldn’t scare anyone as part of the normal cycle, and as we wrote yesterday, your hedging levels should be based on your view of the markets.
The only thing alarming us in this market about over the next couple of weeks is the tech-wreck we’ve seen past 3 days. Subscribing to the theory that tech leads, could be a glimpse into what the rest of the market does. However, so far that has not showed itself in the cost of hedging, but if we do get a 3% snap to the downside in the SPX, expect it to show up in a hurry.

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