Oil Price Spike: Time to Hedge Stock Bets

by: Larry MacDonald

If the price of crude oil doesn’t stop rising soon, stock markets are in for a swoon, judging from sell-offs today and yesterday. So how much further will oil rise?

I don’t know. What I do know is that hedging against this risk might be a good idea even for the Canadian market as highlighted by today’s drop in the broad index -- even though the price of oil climbed yet again.

In Canada, put options on the iShares CDN S&P/TSX 60 exchange-traded fund are one solution. Right now, such put options can be purchased relatively cheaply. The Montreal Exchange’s Implied Volatility Index did tick up Wednesday but the present reading, near 17.25, is still considerably below the peak of 32 reached in January.