It

AP
Images

• 
  The S&P 500 is coming off a sharp selloff that saw
  the index lose more than 50 basis points on two consecutive
  days for the first time since 2016.
  


• 
  Even after the weak patch, downside hedges are still
  attractively priced, and investors should consider loading up
  through collar trades, says Goldman.
  

---

The stock market's two-day selloff was
scary, but apparently not worrisome enough to force traders to
pay up for hedges.

So says data compiled by Goldman Sachs, which shows that while
the Cboe Volatility Index — or VIX
— spiked to a five-month high amid growing worry, it's still on
the low extreme when compared to similarly turbulent periods.
That means the so-called "fear gauge" could have further to run.

Goldman also points out that implied volatility — the price
swings being expected by the market — is still "well below" its
historical average and at a "reasonable premium" to realized
volatility. With downside protection so attractively priced,
Goldman says it's a no-brainer to load up.

"Substantial drawdowns within bull markets are not uncommon, so
hedging is prudent," Rocky Fishman, an equity derivatives
strategist at the firm, wrote in a client note.

The chart below shows just how suppressed the VIX is, relative to
the 7% trading range the benchmark S&P 500 has seen in January.

Goldman Sachs Global Investment
Research

So what's an investor to do? In light of both increased implied
volatility and a spot VIX that's up big year-to-date, Fishman
recommends a strategy known as a "collar." Frequently used in a
defensive manner, collars — also known as "hedge wrappers" —
involve purchasing out-of-the-money put options while
simultaneously writing out-of-the-money call options.

As for the options available to trade in such a strategy, there
are multiple exchange-traded products linked to the VIX that
could work, including the iPath S&P 500 VIX Short-Term Futures ETN and
the ProShares Trust Ultra VIX Short-Term
Futures ETF.

Before we wrap up, to fully appreciate just what's at stake,
let's look at just how severe the S&P 500's two-day selloff
was. The weak patch marked the largest decline since August for a
period of that length, and the first time since 2016 the S&P
500 sold off more than 50 basis points on consecutive days,
according to Goldman.

With stocks appearing to be in recovery mode on Wednesday as
investors buy the dip, investors shouldn't confuse the rebound
with an excuse not to buy protection. As Fishman points out, the
market isn't going to continue shattering records at every turn,
so it's better to be safe than sorry.

Source link

Shorten URL's And Earn Money