The stock market has been in meltdown mode all week, which means traders have been watching their backs.
Amid the carnage that befell stocks through Thursday, they loaded up on hedges to protect against further wreckage. And their urgency to do so pushed costs to exorbitant heights.
This was 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 skyrocketed to levels seen on just a few occasions in the past 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, spiked to a level seen only five times in the past nine years.
In other words, investors had rarely been more defensively positioned for a tech meltdown.
This nervousness may actually turn out to be a saving grace for the market, since the surge in hedging costs shows investors are braced for the worst.
After all, 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 helped stem the sell-off.
Further, traders have made a habit out of buying the dip on weakness. It's a routine that has help extend the 9-1/2-year bull market to an unprecedented length.
Based on the market's sharp recovery on Friday, they seemed to have stepped up. Their hedges held them over, and now they're piling back in — at least for now.
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