Cost of Hedging Weekly Update 5-8-13

Posted on May 8th, 2013

May continues to rally higher since we last reported the cost of hedging. The positive jobs data and impressive revisions on Friday have brought in more buyers.  As of yesterday’s close the short-term daily cost was 0.68 basis points and the mid-term out to December dropped to 0.84 basis points per day.  
See data for the past 22 months on our Resources Page

The mid-term cost is approaching a 2 year low of 0.82 bps per day. We wrote last week that the VIX looked like it was poised to go higher and hence the cost of hedging. We were just looking for a confirmation of that if on the next new S&P 500 high the VIX was above 14. Well, that didn’t happen and we didn’t get confirmation. Instead, after Friday’s data, the VIX dropped into the 12’s and that trend of higher lows when the market made new highs was broken.

That turned out not to pan out, but that is why we waited for confirmation. It’s one of the disciplines we follow. Not making emotional trades and having defined criteria be your guide in the market is much better than relying on your gut. Well at least for us that’s better.  I know plenty of people that try to make a go of gut-trading and a few of them live to trade on, but they are few and far between. That’s why we advocate. a disciplined approach and measured entry and exit criteria. 

As for the cost of hedging, we’re going to continue to support using these levels to lock in gains at a lower than normal price.  We’ve been saying it for the last 3 months, but it continues to be true. If you have laddered your put protection, then you should have some of your protection coming due. Stay disciplined to your hedging strategy and take advantage of these lows.  For example, if you have June protection that is never going to be effective because it is so far OTM, then consider establishing your next hedge early to take advantage of today’s environment. 

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