The cost of three-month put options to sell the Standard & Poor’s 500 Index is almost twice the price of calls to buy, the highest ratio since July 2007, according to data compiled by Bloomberg. Investors are paying a high price to hedge against a drop in the US stock market.
“We are buying puts and protection across the board. There are many open fronts, too many question marks.”
Sergi Martin Amoros
The end of the Federal Reserve’s Treasury repurchase program is prompting options traders to pay the most in four years for protection against stock declines, a signal that proved bullish in the past, Bloomberg reports.
The cost of three-month put options to sell the Standard & Poor’s 500 Index is almost twice the price of calls to buy, the highest ratio since July 2007, according to data compiled by Bloomberg.
The last 17 times that so-called skew rose as high, the benchmark gauge for American equities climbed a median 3.9 percent over three months, data compiled by Bloomberg show.
Traders are loading up on insurance in the options market on speculation policy makers will halt their program of quantitative easing in June.
“A Major Trend”
Similar purchases preceded gains in the past because they meant professional investors who use the contracts as hedges are buying stocks, said Pam Finelli, head of European equity derivatives research at Deutsche Bank AG.
“Risk management and portfolio protection is a huge theme in the market and it’s not unusual to see people expanding their equity allocation, but doing so with a hedge in place,” Finelli says in an interview from London.
“The equity market goes up but the puts stay bid because there’s an underlying hedge that’s being put on at the same time. This has been a major trend.”
Sergi Martin Amoros, chief executive officer at Credit Andorra Asset Management in Andorra, added to equities following the March 11 earthquake in Japan, he said in a telephone interview on April 21.
He’s also buying protection on the firm’s 4 billion euros ($5.8 billion) in investments.
“We made the most of the March sell-off to add to positions as equities had weakened,” he said.
“There were good prices and we took the opportunity. We are buying puts and protection across the board. There are many open fronts, too many question marks.”
The S&P 500 fell 0.2 percent to 1,334.60 as of 9:42 a.m. in New York. It climbed 6.3 percent this year through April 21 as the US unemployment rate unexpectedly dropped to a two-year low of 8.8 percent in March as companies created more jobs than forecast, the Labor Department said earlier this month.
The economy probably expanded at a 1.9 percent annual pace in the first quarter and will grow at an average rate of 3.1 percent though 2013, according to the average of estimates in a Bloomberg survey.
Bloomberg’s Jeff Kearns and Whitney Kisling report the conversation between Howard Present, president and chief executive officer of F-Squared Investments Inc., and Carol Massar, Matt Miller and Adam Johnson on Bloomberg Television’s “Street Smart.”