Cost of Hedging Weekly Update 11-14

by Jay Pestrichelli on November 14th, 2012

The cost of hedging continued to rise ever so slightly this week as the market gave back another 1.5% dropping to 1375.

See data for the past 15 months on our Resources Page
The odd man out this week was the VIX. Despite a market decline and a rise in cost of hedging, the VIX actually declined almost 10%. Normally with a 1.5% sell off we would have expected a RISE in the VIX, not a decline, of at least 7.5%. If that would have happened the cost of hedging would have been notably higher.
Based on this out of alignment on the VIX, there is probably some pent up price movement to the higher side if this was to pop back into line. However, we can’t ignore what the speculators are telling us. As a reminder the VIX intends to indicate the volatility of the next 30 days and while it is referred to as the “fear” indicator, it really is a reflection of traders’ appetite to speculate.  If the short-term outlook of the market is to be less volatile, the rise in the options 90+ and 200+ days out tells us that protection is being built out despite what the speculators are thinking.
This isn’t too surprising as the Fiscal Cliff looms, but it is odd that the longer minded traders are ignoring what the short-term traders are doing. We won’t make too much about it, but if indeed the market does correct further, expect to see those short-term traders catch up to the hedgers and option prices rise.

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