Cost of Hedging Weekly Update 3-12-13

by Jay Pestrichelli on March 12th, 2013

As the S&P 500 approaches its all-time high today, it’s more of the same today when it comes to the cost of's low low low. Before the open this morning the short-term costs stand at 70 bps per day and the mid-term costs have dropped to 88 bps per day, the lowest we’ve seen it in the 20 months we’ve been tracking it. 
See data for the past 20 months on our Resources Page
I continue to be impressed with this rally and the remarkable low levels of volatility. Yesterday the VIX hit an 6 year low not seen since April 2007. But I keep looking at the chart of the VIX and it feels very much like the decline that index went through from 2002 to 2005. That 3 year decline in volatility from the mid 20’s down to 10 stayed in a pretty tight range and saw the markets rise by almost 45%. This of course was coming off the lows of 2001.
Our current situation has already seen a 100% recovery in the last 4 years off the lows of the credit crisis, so we’re not insinuating another 45%. However, right now there seems to be little signs of slowing the rally of 2013. March has already seen a 2.6% rise and lived up to its expectations following a positive January and February. That’s just some history we pointed out in our post on March 1st titled: The January Effect.

It’s going to be tough to call when this market turns. Perhaps it will be the old “Sell in May and go away” axiom that causes a breather. With the cost of hedging so low, it doesn’t cause a lot of harm to build in protection in anticipation of some kind of sell-off.  Last week we started rolling clients into September and January 2014 protection due to the low cost, and we’ll continue to do so this week as well.

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