Hedging has never been so affordable

Jul 25, 2023 thejournalbiz

After a record rally in stock prices, it might seem prudent to hedge your bets. Good news: Doing so has never been cheaper.

It has never cost less to protect against a stock-market slide, according to BofA data back to 2008.

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It has never cost less to protect against a stock-market slide, according to BofA data back to 2008.#hedge #fund #stocks #investing pic.twitter.com/kcGWMghYcI

— The_Journalbiz (@the_journalbiz) July 25, 2023

Factset chart

That’s based on the price of put options that would payout if the S&P 500 fell 5% in the next year.

Why so cheap, you ask?

High rates, low volatility and dispersion among stock performances has eaten into the initial outlay a trader would need to pay for puts. That offers “a historic entry point for hedges,” according to BofA analysts.

One measure of the price of options used to hedge against stock routs is the Cboe Volatility Index (VIX). The VIX, known as Wall Street’s fear gauge, has been hovering below 14—near its lowest levels since February 2020.

The backdrop doesn’t look so benign, however.

BofA raises red flags with this market environment, saying hedges ought to be pricier. With inflation still out of the Fed’s comfort zone, material risk of recession, and elevated stock valuations, it might be time to add some protection, they say.