Cost of Hedging Weekly Update 10-29-13

by Jay Pestrichelli on October 29th, 2013

Well into the earnings cycle, the market continues to rise causing the cost of hedging to drop to an all-time low. As of the close of business on the 28th  the short-term daily cost dropped to 0.59 basis points per day and the mid-term cost out to June 2014 fell to 0.93 basis points per day.  
See data for the past 28 months on our Resources Page

The drop in the cost of hedging continues as just 3 weeks ago we were at a near term high. As the market presses to new highs and the VIX treads with a 13 handle, hedgers are given an opportunity to put on protection via long puts at a very affordable price. However, this low level is more pronounced in the short-term time frame vs. the medium. Hedging out to June 2014 is still affordable, but not at the new low we are seeing for Jan 2014 puts.
Historically speaking, the cost of hedging does not remain this low for long. While this may not be the end of the decline in put premiums, the past performance tells us there will be a short-term pop coming soon. So if you’re looking for a trade idea, there are opportunities to buy near expiration puts.

Long-term, however, hitting these lows typically means a green light for long stock positions over the next 3-4 months. It may be choppy, but bullish positions may be the right way to go through the rest of the year and even into Q1 of 2014. And why not? It’s cheap enough to buy the protection in case that thesis is wrong. You might as well ride this trend while the insurance is this low. 

Posted in not categorized    Tagged with no tags


Leave a Comment