of S&P500 has made an impressive recovery, rebounding more than 17% from its March lows on the back of optimistic prospects for tariff relief, solid earnings, and a strong recovery in semiconductors. It’s a move that paid off with patience. It’s also a quiet way to make hedging more affordable and more strategically sensible.
Arithmetic is easy. When volatility is compressed, protection costs are reduced. and vicks The implied volatility factored into put options has been declining sharply, remaining in the low teens, well below the stress level associated with the sharp decline in March. Today, the cost of buying a one-month 2-2.5% out-of-the-money put (approximately 30 “delta,” sometimes written as 30^) is a fraction of what it would have cost when the market was in free fall. If you’re the type of investor who likes to hedge when you can, rather than when you have to, now’s your chance.
And there’s good reason to think hedging still makes sense, given the conditions that drove the rise, including progress on tariffs, the resilience of earnings, and hopes that the Strait of Hormuz bottleneck might be resolved. That and momentum is not the same as resolved fundamentals. With rising oil prices and rising inflation, the Federal Reserve has been left virtually untouched. As a result, US Treasury yields are rising relative to year-to-date lows, and gold continues to show that institutional investors’ demand for safe-haven assets has not evaporated, even as it retreats from its January highs.
of Equal weight S&P 500 Despite the market-cap weighted index rising, it has stalled near historic highs. People who care about “width” may need to pay attention to the difference.
After a 17% rally, portfolios that entered this year on the defensive are now saddled with significant unrealized gains. Decision asymmetry changes. The downward costs of being wrong increase, while the marginal benefits of further upward participation decrease.
By purchasing short-term 30-day, 30-delta puts, you can lock in a significant portion of your profits at current implied volatility levels. For example, to buy a June 26 weekly $730 exercise put, you could pay about $7.40 or about 1% of SPY’s current level.
One more thing: if you experience a meaningful drawdown, be sure to “monetize” your hedge. If the put goes into the money, roll it down or down and out. Failure to do so is similar to not filing an insurance claim in the event of an accident, and your premiums will be wasted.
The best time to get insurance is not when your house is on fire. That’s after the smoke clears, before the next storm develops.
