UBS, Credit Suisse Tout Nasdaq Hedge as Protection Costs Spike

(Bloomberg) --

The explosion in volatility from the escalated U.S.-China trade war has made hedging more expensive than it was just a few days ago but strategists still see relative opportunities in downside bets on the Nasdaq 100.

The technology-heavy gauge's year-to-date outperformance against the S&P 500 Index makes it a preferred vehicle for hedging strategies, and the relative cheapness of its implied volatility increases the attraction of downside option bets, according to UBS Group AG and Credit Suisse Group AG.

“While equity volatilities have been repriced significantly higher, we think there is still value in owning QQQ downside,” Credit Suisse strategist Mandy Xu wrote in a note Monday, referring to the Invesco QQQ Trust Series 1 exchange-traded fund which tracks the Nasdaq 100.

The Nasdaq 100 fell 3.6% Monday, its biggest drop this year, as China retaliated against U.S. tariffs by allowing the yuan to fall and announcing it would cease purchases of American farm goods. Still, it remains over 17% higher year-to-date, compared to a 13.5% gain in the S&P 500.

The difference between 3-month implied volatilities in the indexes, a gauge of the relative cost of purchasing options, was just off the lowest this year, according to data compiled by Bloomberg. The Cboe Volatility Index rose 40% to 24.59 on Monday, its highest since January.

“We still prefer the Nasdaq for hedging,” wrote UBS strategist Stuart Kaiser in e-mailed comments Monday. With the absolute cost of hedging high, the strategist had highlighted the relative value in Nasdaq volatility in a note to clients Sunday.

Xu suggested clients use put spreads to protect against downside in the tech gauge. The strategy involves buying and selling equal number of put options, downside bets on the Nasdaq, at different strike prices, and would pay off if the index suffered a modest decline.

“While the additional Trump tariffs jolted markets last week, the game changer was China's response over the weekend by allowing the yuan to weaken above 7,” Xu said. “We think risks going forward are tilted to the downside.”

To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cormac Mullen, Andreea Papuc

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