The S&P 500 has staged an impressive recovery, rallying more than 17% off its March lows on a combination of tariff relief optimism, resilient earnings and a powerful rebound in semiconductors. It is a move that has rewarded patience. It is also one that has quietly made hedging both more affordable and more strategically sensible.
The arithmetic is straightforward. Protection costs less when volatility is compressed. With the VIX sitting in the high teens, well below the stress levels that accompanied the March selloff, the implied volatility priced into put options has pulled back sharply. Buying a one-month 2-2.5% out-of-the-money put (about 30 “delta”, sometimes written as 30^) today costs a fraction of what it cost when the market was in free fall. If you’re the type of investor that likes to hedge when you can, rather than when you have to, now’s your chance.
And there’s good reason to think hedging still makes sense, consider the conditions that drove the rally: tariff progress, earnings resilience and hopes the bottleneck in the Strait of Hormuz might resolve. That and momentum are not the same as resolved fundamentals. The Federal Reserve remains effectively sidelined as higher oil prices have pushed inflation higher. Consequently, Treasury yields are elevated relative to year-to-date lows and gold, despite retreating from its January peak, continues to signal that institutional safe-haven demand has not evaporated.
The equal-weighted S&P 500 has stalled near prior highs even as the cap-weighted index pushes higher. If one cares about “breadth”, that divergence may warrant attention.
After a 17% move, portfolios that entered the year defensively are now sitting on meaningful unrealized gains. The asymmetry of the decision shifts: the downside cost of being wrong has grown, while the marginal benefit of further upside participation diminishes.
Buying a short-dated 30-day, 30-delta put can lock in a meaningful portion of those gains at current implied volatility levels. For example one can pay about $7.40 or ~1% of the current level of SPY to buy the June 26th weekly $730 strike puts.
One more thing – be sure to “monetize” your hedge if we do see a meaningful drawdown. Roll down or down and out if the puts go in the money. Failing to do that is a bit like failing to file an insurance claim in the event of an accident – the premiums go to waste.
The best time to buy insurance is not when the house is burning. It is after the smoke clears — before the next storm forms.
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