The stock market has been in meltdown mode all week, which means traders are watching their backs.
They’re loading up on hedges to protect against further wreckage. And their urgency to do so has pushed costs to exorbitant heights.
That’s been especially true for the formerly red-hot tech sector, which, until recently, was the unstoppable engine driving the market to new highs. The cost to hedge against further losses in tech has skyrocketed to levels seen on just a few occasions in the last several years.
A measure called skew, or the premium options traders are paying to protect against a 10% loss in the PowerShares QQQ Trust ETF over the next three months, relative to wagers on a similar increase, has spiked to a level seen only five times in the past nine years.
In other words, investors have rarely been more defensively positioned for a tech meltdown.
Business Insider / Joe Ciolli, data from Bloomberg
This nervousness may actually turn out to be a saving grace for the market, however, since the surge in hedging costs shows investors are braced for the worst.
After all, one-month skew was never this elevated — even at the height of the tech bubble, when downside protection was needed most. Theoretically, this type of preemptive behavior could help stem a sell-off.
Further, traders have made a habit out of buying the dip on weakness. It’s a routine that’s help extend the 9-1/2-year bull market to an unprecedented length.
But based on how the past week has gone, they’d better step up soon. Because their hedges will only hold them over for so long.