With the “smart” money (as defined by Don Hays) exiting the stock market in droves, yield curves collapsing (now with extra help from a “Twisting” ECB), extreme speculative positioning in bonds, and a dramatically diverging economic reality from market narratives, the possibility of a crash – Fed triggered or not – is rising. Do ‘they’ know something the “dumb money” does not?

And with everyone still the same side of the rates boat…

Bank of America is warning that the current market feels ominously similar to that right before the 1998 Asia Crisis and LTCM blow-up.

The question is – what’s the cheapest way to hedge against a crash scenario?

Bank of America’s Jason Galazidis has some answers for traders looking for some protection. The screen below shows that the hedges, ranked by the average, which are most underpricing historical drawdowns are Gold calls, EUR 10y receivers and TLT (US 20y+ Treasury) calls:

EUR 10y receivers and TLT calls screen as the best value hedges after Gold calls. Interestingly, USD 10y receivers screen materially richer owing to increased demand on heightened US trade tensions.

HSCEI puts are the second best screening equity hedge after RDXUSD (Russia) puts despite the HSCEI being the worst performing equity index in our screen (YTD peak vs. current levels).

EU Credit payers have richened remarkably over the last few months, particularly in IG, following the extreme widening in EU-periphery bond spreads in May. Our credit derivatives strategists note that the richening of downside tails in credit (payer skew) reached 8y extremes driven by heavy hedging demand.

As a reference, the table below shows the largest drops (or gains in the case of GLD, gold, Euro and US 10Y and TLT as designated with **) within 3 month in each asset class between ‘06 and ‘17, ranked in the same order as the assets in the chart above. The table shows that gold not only has a high vol delta but is consistently one of the best performing assets during crisis times.