On Wednesday we laid out two options hedges to insure portfolios against the risks of a failed debt ceiling debate and/or downgrade: 1) Long S&P (SPY) puts and 2) Long Gold (GLD) calls. The SPY Aug 132 puts we mentioned have done well, gaining 70% to the current price of $4.33, while the GLD Aug 160 calls are +8% at $2.30. 

To recap, we said we'd expect increased volatility and fear as the debt deadline approached in the absence of an agreement, and that is exactly what has materialized over the past few days. The S&P puts have been the biggest beneficiary, as the VIX has spiked sharply on the growing concerns. The spiking VIX illustrates the increased options premiums that are demanded as a result of the heightened uncertainty. This uncertainty has resulted in a 4% decline in the S&P this week and a 45% spike in the VIX. GLD has seen a more modest move this week, gaining just 1.6%.

As far as the hedges go, the uncertainty remains but for those long the S&P puts, it may make sense to lock a portion of the hedging gains in as the larger negative delta puts now represent a larger short position. However, with no solution a protective position remains prudent. The GLD calls have not done as much, but the idea remains the same -- gold could be the ultimate safety shelter if things deteriorate elsewhere.

The situation with regard to the debt ceiling remains in flux, with a very important weekend approaching. Although most still expect an 11th hour deal to get done, the market remains on edge and nervousness grows with each day that passes absent a deal, as it increases the chance of default. Additionally, the market has also been pricing in greater odds of a ratings agency downgrade. It's still impossible to say how things will ultimately play out, and how the market will react, so the idea of hedging longer-term positions around this period of increased volatility still makes sense.

-Chris Borgmeyer, CFA