Cost of Hedging Weekly Update 1-25-13

by Jay Pestrichelli on January 25th, 2013

We've been quiet for a few weeks since out last update on the cost of hedging mostly because there hasn't been too much to report. But the last few days have taken us out of hibernation due to a drop in costs to levels not seen for half a decade.  Here are the numbers: the short-term cost of hedging hit as low as 0.69 bps per day and the mid-term to 1.03 bps per day. This is LOW!
See data for the past 17 months on our Resources Page

Usually, we take this opportunity to point out that buying hedges when they are cheap is a good way to lock in protection at a low cost. But this time we’ll add that setting your downside protection when the market is at 5 year highs sweetens the deal. Simply said, you can buy protection through January 2014 at the 1350 level on the S&P 500 for about 3.5%; which is where the market touched just two months ago in mid-November.  I'll say that in another way, you could lock in 
As we wrote in our blog yesterday about put buying, hedging turned out to be an unnecessary precaution last year. However, we stick with it because we never know when we’re going to need it. What we do know is markets don’t go straight up forever and having the peace of mind of building protection allows us to invest in a disciplined manner. We’re not bearish on this market, but we know it can rear its ugly head when no one is watching in ways no one expected.

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