Cost of Hedging Weekly Update 4-23

Posted on April 24th, 2013

After two strong up days we see the cost of hedging retrace back to pre-Boston levels. As of yesterday’s close the short-term daily cost was 0.73basis points and the mid-term out to December was also 1.00 basis points per day. 
See data for the past 21 months on our Resources Page

 As earnings continue to progress, the market’s reaction has been positive. For the most part, earnings have beat expectations however revenues have come in lower than expected on average and forward guidance has been less than stellar.  This has caused some volatility to come into the market, but the cost hedging has not ticked up very much.

This is due predominantly to the VIX giving back everything it gains from down days. Lower VIX means lower probability of dramatic drops and that leads to a lower cost of hedging. We’ve written about this before, but one of the great benefits of a higher market is that protecting gains get cheaper.  It might seem counter intuitive, but when the market hits new highs and market timers feel a pull back is imminent, hedging is the cheapest.  Keep that in mind as you’re rolling and putting on your hedges.

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