CHART OF THE DAY: A Simple Visual... Cheaper to Hedge When the Market is Going Up

08/16/18 09:21AM EDT

Editor's Note: Below is a brief excerpt from today's Early Look written by Macro analyst Ben Ryan. Click here to learn more about the Early Look.

For those new to the process, we’re always very interested in how implied volatility (volatility assumptions backed out of options prices) changes relative to realized volatility under different return scenarios. What we’ve found is that implied volatility usually gets pushed lower in periods of short-term strength.

In other words, it gets cheaper to hedge when the market is going up. When it corrects, demand for insurance goes up afterwards. Our goal is to use these reactionary trends for market color.

As an example with the S&P 500 SPDR ETF in the month of August, implied volatility traded at a discount to realized volatility when the market took a peak at all-time highs the first week of August, and now, after a correction, the cost of hedging has surged.

CHART OF THE DAY: A Simple Visual... Cheaper to Hedge When the Market is Going Up - 08.16.18 EL Chart

CHART OF THE DAY: A Simple Visual... Cheaper to Hedge When the Market is Going Up - early look

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