HIPOS Weekly Update: Another Trade in the Books Despite Continued Low Volatility Regime
Source: J.P. Morgan Top Three Questions David Lebovitz
Last week I received an email from J.P Morgan Asset Management asking, “Where has all the volatility gone”? That is a question many have been asking this year. In the piece linked above the author David Lebovitz pointed out that thus far 2017 has seen the lowest implied volatility on record. Naturally as someone who regularly writes articles around our HIPOS short volatility strategy, this perked up my interest.
Before we get into the article a bit more, a quick refresher on implied volatility. When we think about how volatile an index or stock has been over a previous period, that is called historical or “realized” volatility. It is a measure of what has happened. Looking back, you can see how large a range prices have moved. Implied volatility is really the markets expectation of how much a market or stock might move in the future and therefore embeds that expectation in option premiums. The more volatile a market is expected to be, the higher the price for its options will be.
Good examples of how option premiums rise in anticipation of large moves are the FANG stocks (Facebook, Amazon, Netflix, Google) right before an earnings release. Typically, you will notice implied volatility rising quite a bit as the options market is expecting a large move one way or the other due to the release of the quarterly numbers.
In the J.P. Morgan note they pointed to a couple reasons they felt contributed to this current low implied volatility atmosphere. One interesting observation Lebovitz states was that actual realized volatility has fallen to such a low level that has only happened a few times over 60 years.
So, what does this have to do with HIPOS? Well, as you already know, our last primary spread trade expired worthless at a full profit. The ZEGA trading team has already been scanning the markets for the next trade that may qualify under our strict rules for entry. The seemingly never ending low volatility environment has meant that some of our trades entered were only available for extremely short windows before disappearing. A while back we posted an article going more in depth explaining how different volatility levels affect where we can find spread positions to enter away from the market.
Since ZEGA operates HIPOS based on strict rules, your clients might see some time between when a trade expires and when the next one is put on. We’ve found it is better to wait ready and pounce when conditions for entry present themselves.