HIPOS Weekly Update: Volatility on Fall Break?

by | Sep 21, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), S&P 500/SPX, Technical Analysis

Last Friday saw a successful expiration of our latest primary HIPOS trade. As we’ve previously pointed out, when trades expire worthless they are then removed from your clients’ accounts thus realizing the full profit. Our traders, as always, are analyzing conditions to find the next entry that meets our stringent rules. Regular followers of the blog understand that typically new trades are placed around short-term spikes in volatility.   Over the past couple of years, we are experiencing periods of low volatility, quick jumps, and then drops back to the low volatility environment.

An interesting observation the ZEGA investment committee noted this week is the Russell 2000 Index volatility index (RVX) registered an all-time low as seen in the graph above. Normally the Russell 2000 historically has maintained the highest volatility compared to the Nasdaq 100 (NDX) and S&P 500 (SPX). Recently we’ve seen the NDX rise against the others as tech experienced a shorter term.

For the time being we will be waiting to pounce on the right opportunity to enter a new position. Being selective and patient are keys to a short volatility strategy. Picking our spots allows us to enter trades which give your clients the best probability for success. Volatility sometimes spikes around events like a Federal Reserve decision. While yesterday saw markets move a little bit, it did not produce any meaningful raise in volatility.

Recently I was in a conversation about the probability the Fed would raise rates and at what meeting. Surprised I could rattle off a probability percentage so quickly for the meeting, I had to let them on my secret source. The CME Group (Chicago Mercantile Exchange) maintains a tool where anyone can view the probability based on the fed funds futures of fed discount rates in the future. Essentially, they take the data from prices on futures contracts based on the fed funds rate and then convert them to probabilities. On the left-hand side menu you can also view the famous Federal Reserve “dot plot”. The link, will enable you to play armchair interest rate prognosticator.

If conditions should change with our HIPOS strategy we will update via our blog. If not, we’ll check in next week with a regular update on market conditions.

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