Cost of Hedging Weekly Update 5-24-13

by Jay Pestrichelli on May 24th, 2013

This past week’s pull back in the US markets was nothing compared to rest of the world. It appears the US is still the country of choice for investing, but not immune to some pressure. As of yesterday’s close the short-term daily cost was 0.79 basis points and the mid-term out to December dropped to 1.01 basis points per day.  
See data for the past 22 months on our Resources Page

I’ll keep it short today as it’s Friday before Memorial Day. Consider the following: This week Japan saw a single day sell off of 7%. Luckily that was lost in translation by the time the US markets opened, but the cause for it still exists here in the States. If a market inflated by central banks can turn on a dime in Japan, the same kind of risk can exist here. Perhaps the magnitude will be different, but a look at Wednesday’s decline and the lower open Thursday can be equated to an emotional reaction to the Fed meeting notes. To say this market an emotionally driven one would be an understatement.
As such, we’re selling puts as a way of entering new positions this week about 5% below the current market and hedging them by buy puts even farther away. We may finally get some choppiness in June and if that’s the case, using a disciplined approach for putting money to work in a hedged fashion should limit our exposure if the end of the bull is near. 

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