It’s Getting Expensive to Be a Bear as Rules Pinch Options

Bloomberg reports:

More than just a casino for day traders, the options market is where institutions pay millions of dollars a day to hedge investments. Lately, amid a crackdown on risk-taking, they’ve been paying a little more.

Prices for Standard & Poor’s 500 Index put contracts, the options that act like insurance policies on stocks because they gain value when shares sink, have jumped this year to the highest levels on record relative to bullish calls. In one example, an option that appreciates if the market slides 10 percent by July has seen its cost shoot more than 120 percent above the corresponding bet on a rally. That’s twice the average spread since 2005.

In a bull market that hasn’t seen a 10 percent correction since 2011, it makes sense that prices are higher to protect equity holdings. But more may be at work. Rocky Fishman, an equity derivatives strategist at Deutsche Bank AG, says hedging costs are going up as dealers are crimped by regulations and self-imposed risk controls stemming from the financial crisis.

An article well worth your time.