Cost of Hedging Weekly Update 4-3

Posted on April 4th, 2013

Yesterday seemed to have cause a little shake-up and it appears that these down days are getting deeper and deeper with lower intra-day bounce-backs. The selloff after the new record highs from Tuesday pushed the cost of hedging slightly higher. As volatility popped 10% and 2 of the first 3 days in April have shown the rally running into some headwinds, investors are wondering if this is the beginning of the pull-back everyone is waiting for. As of yesterday’s close the short-term daily cost was 0.77 basis points and the mid-term out to September was 1.04 basis points per day.

See data for the past 21 months on our Resources Page

The jobs data tomorrow seems to be what everyone is looking out for. As artificially hyped up events usually do, they will bring a whole lot of nothing. Don’t let these headlines derail you; stay the course that you’ve planned for. Like we said in March, if the data that made you bullish in January hasn’t changed, then you should still be bullish now. There has been no new info on the most important data point to the equity markets.
And what is the most important data point you ask? Well for us, it’s earnings. The market is, and always will be a reflection of companies’ ability to earn profit. Those are what you should be looking out for. It’s what fundamental investors always point to time and time again. Even technical traders will watch for earnings because the long term impact of earnings will set the tone for them when deciding the direction of the trend to follow. They do this in the form of assessing whether we are in a multiple expansion or contraction environment.
We bring this up in a cost of hedging post because we want investors to remember that during the 6 primo weeks where companies report, the market can very well have a notable jump in volatility and day-to-day fluctuation. So use the up days to buy protection (as hedging gets cheaper) and watch for those down days for selling options for income (pops in volatility).  That may mean rolling calls that are in the money out to the next month or even selling puts at levels where you would be interested in increasing a position. If the last few years have shown us anything, the 2nd quarter earnings data will give you plenty of opportunities to do all of those things.

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