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Fear of Stock Market Dive Creeps Back as Hedging Costs Climb

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(Bloomberg) -- The S&P 500 Index’s surprise 16% rally this year is rewarding traders who bought in early and punishing those who’ve remained skeptical. But fear of a downturn remains.Most Read from BloombergBoss of Failed Crypto Exchange Gets 11,000-Year SentenceCalifornia Shows an Electric-Car Uprising Headed for the USEverything Apple Plans to Show on Sept. 12: iPhone 15, Watches, AirPodsWall Street Fears a Too-Hot Economy as Recession Bets PlungeUS, EU Agree on Mideast-India Rail and Shipping

Investors can see it in the options market, where hedging against another rout is getting more expensive. Contracts betting on a 10% decline in the SPDR S&P 500 ETF — the largest exchange-traded fund tracking the index, better known by its ticker SPY — cost 1.8 times more than options that profit from a 10% rally, data compiled by Bloomberg show.

“The next big leg of the equity rally won’t come until we get certainty on the direction of rates,” said Scott Ladner, chief investment officer at Horizon Investments. Traders are betting that the Fed will keep borrowing costs steady in September, but they also expect another rate hike before the end of the year.

Traders who don’t think the lull in volatility will last are using the calm to pick up protection on the cheap, according to Scott Nations, president of Nations Indexes, an independent developer of volatility and option strategy indexes. The cost to protect against a resurgence in volatility is close to the cheapest it’s been since before the pandemic-fueled selloff in March 2020.

 

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