A trader works on the floor of the New York Stock Exchange (NYSE) a day after the market closed for over three hours yesterday due to a ‘technical glitch’ on July 9, 2015 in New York City. The market had a normal opening today with no reports of problems.
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The cost of betting on a stock-market crash hasn’t been this low since 2008, per Bank of America.
High interest rates and low equity volatility are driving down the price of S&P 500 put options.
“Since our data began in 2008, it has never cost less to protect against an S&P drawdown in the next 12 months,” the bank said.
Investors looking to position for, or hedge the risk of, a stock-market crash are in for a bargain.
According to Bank of America, betting on a plunge in US equities over the coming 12 months hasn’t been this cheap since 2008, thanks to a slump in the price of bearish options.
“Since our data began in 2008, it has never cost less to protect against an S&P drawdown in the next 12 months,” Benjamin Bowler, BofA’s top global equity-derivatives strategist said, per MarketWatch.
That’s because a combination of low stock-market volatility and high interest rates has slashed the cost of put options, which are derivative contracts that grant the right to sell an asset on a future date at a predetermined price.
Fluctuations in US equities have narrowed significantly in recent months with the onset of a new bull market, with the CBOE Volatility Index recently falling to its lowest level in 3 years.
Additionally, high interest rates tend to reduce the cost of put options. US borrowing costs have risen sharply over the past five quarters, with the Federal Reserve raising benchmark rates by 500 basis points to quell inflation. Traders are bracing for another 25-basis-point hike this week.
Per BofA, the price of purchasing S&P 500 puts and put spreads maturing in a year is lower than it was in 2017.
A number of leading market thinkers have warned that US stocks could plunge due to high interest rates, stretched equity valuations, and recession risks. That’s despite the S&P 500 rallying almost 19% so far this year, taking its gains since the end of 2008 – the year of the global financial crisis – to more than 400%.