Long-term crash protection put option cost has doubled.Traders pay up for crash protection-time to worry. Just a structural change or an ominous sign of things to come?
“Long-dated crash put protection costs on the have more than doubled over the past 9 months,” a Goldman Sachs options research team led by John Marshall wrote. “We believe it is an important development to watch as it implies investors are increasingly concerned about downside risk even as U.S. equities trade near all-time highs.”
Specifically, the options that have more than doubled in value are 55 percent out-of-the-money puts that expire in five years. That is to say, in order for these derivatives to pay off come expiration, the S&P would have to lose more than half its value over the next five years.
“We see reason for concern as put prices were up a similar amount in 2007 ahead of the financial crisis, diverging from credit and equity at that time as well.”
This is a complex matter to discuss and the increase above could be caused by a number of different things. Changing dynamics in the options markets, hedging, balance sheet issues, etc…. With that in mind, maybe some smart folks are building large short positions in an anticipation of a large decline or worse, a crash. That would make even more sense.
