While the dollar is falling at a record pace, Bank of America said in a note on Tuesday that investors may be inclined to breathe a sigh of relief.
However, the bank questioned whether the path was really clear yet.
After a spike in volatility on August 5, the VIX quickly stabilized, falling to its year-to-date average before August in just seven days — a record correction, analysts at Bank of America explained.
The bank stated that “the speed of this decline was historic, as the Volatility Index (VIX) fell from its peak to below its long-term average in just seven days (the fastest in history).”
Despite the rapid recovery, Bank of America warned that many risks, ranging from macroeconomic, political and seasonal factors, still loom.
With volatility back to relatively low levels and stocks resuming their rally, analysts at Bank of America believe hedging against the downside remains a wise strategy.
They suggest taking advantage of S&P’s put spreads, which benefit from lower volatility and a recent rise in bias, which could provide “a return of more than 7x” if optimism fades.
Furthermore, Bank of America says investors may explore fixed-strike hedges that can be further reduced in cost by leveraging the election risk premium in the VIX duration structure.
Bank of America also notes that the current market offers a “favorable correlation entry point,” which is encouraging the use of S&P-linked hybrid interest rates for those concerned about the risk of “higher rates for longer.”
These hybrid currencies are said to be particularly useful if the Fed does not commit to cutting interest rates amid ongoing macro uncertainty.
While the rapid decline in the Volatility Index (VIX) may indicate that the worst is over, Bank of America believes the prudent approach is to remain protected against potential downside risks as the fall approaches.
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