Cost of Hedging End of Quarter Update

Posted on March 28th, 2013

As the SPX breaks through its resistance today to all-time highs, we’ll take a look at the cost hedging over a longer period of time this week. As of yesterday’s close the short-term daily cost was .83 basis points and the mid-term out to September was .92 basis points per day. This is the tightest we’ve seen these two data points so far in 2013. Meaning the market is pricing the 3 month protection almost the same as the 6 month level of protection on a daily basis. 

See data for the past 21 months on our Resources Page

I’m sure you’ve heard it before, but 2013 is shaping up to look very much like 2012. If you plot the previous 5 months against that same period last year the pattern has lot of symmetry. You can see below that we’re approaching the time last year when we had a slight correction. The old adage “Sell and May and go away” certainly played out well last year.
(Wow, that's an ugly color scheme on this graph)

However, when we compare the cost of hedging of the two years, the story has a little different tone. Yes, they both show declines in the mid-term costs as the market rose from November through March. But, data for this current year is running at a notably lower level.  I think the chart below will speak for itself.
Yesterday my co-author challenged us to think about if we were in the middle of a secular bull market or at the end of it. Either way, I’ll say that history has showed us this time of the year can be a choppy time for the market and some of might consider these low cost of hedging to be a gift not worth passing us…just to be sure.

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