Cost of Hedging Weekly Update 10-18-13

by Jay Pestrichelli on October 18th, 2013

A deal has been struck and low and behold we did not default on our debt driving a sense of euphoria into the markets.  Now we’re back to watching the Fed keep the cost of money low and the markets like it. As of the close of business on the 17th  the short-term daily cost dropped to 0.7 basis points per day and the mid-term cost out to June 2014 fell to 1.02 basis points per day.  
See data for the past 28 months on our Resources Page

The massive drop in the cost of hedging can be directly attributed to the mass selling of short-term, hedges that seem to have no chance of providing value to traders now that the deal has been reached. That selling of hedges drove down the price of put options and reflected in the VIX. Since last week’s update when the VIX clocked in at 20.34 itis down to 13.48. Even more impressive is just the 2 day drop from 18.66 to the current level. That’s a 28% decline in 2 days.
 
With the market at new highs and the price of hedging dropping so dramatically, it stands to reason that now is a great time to hedge. If you had the fortitude to not get emotional and buy into the fear of the government’s dysfunction you probably are feeling pretty good. But if you were a hedger, you didn’t have to hold tight as you knew you were already protected. Now that everyone is breathing a sigh of relief, it is the time to hedge, not when everyone is scrambling for some kind of protection from the impending doom.


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