Cost of Hedging Weekly Update 8-28-13

by Jay Pestrichelli on August 28th, 2013

August continues to show stock market weakness and yesterday’s 1.5% decline didn’t show any signals that the selling is over.  As of the close of business on the 28th the short-term daily cost was 1.02 basis points per day and the mid-term cost out to March 2014 rose to 1.23 basis points per day.  
See data for the past 26 months on our Resources Page
Yesterday’s sell off was a pure fear trade. Worries about what the U.S. is going to do in Syria and the annual debt ceiling discussion sent the markets lower. It was also a day that saw normal a normal bond-stock correlation of risk averse assets running for safety into debt positions pushing yields lower.  Unfortunately this sets us up for more bad stock days when these fears subside and we get back to the QE discussion. We'll get to that later in September I'm sure. 
On a relative basis, we’re on the higher side for the cost of hedging compared to the rest of the year, but not yet at the highs of June. In other words, it’s not the worst or best time to hedge. However, compared to historical standards, it is still relatively cheap to put on protection at 10% below the market’s current levels.

For those of you that have September put protection expiring, it’s still too soon to roll those. But keep an eye for any other dip in cost of hedging and consider moving early before waiting for the actual September expiration. 

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