HIPOS Weekly Update: A Healthy Serving of Low Volatility
Our latest iteration of the HIPOS spread trade took advantage of a brief blip higher in volatility to enter the position. Since then the underlying Nasdaq 100 Index (NDX) has moved higher which is a positive for your clients. As of early trading Wednesday, the index is sitting above 14% above the short strike price and above the purple defensive posture curve. With 23 days to expiration on December 15th, the trade is moving along and will continue to realize positive time decay. Even tomorrow when the market is closed.
We posted a link yesterday highlighted ZEGA’s own Jay Pestrichelli appearing at the Nasdaq market site in New York. One of the questions that came was around just how low volatility has been this year, and what that has meant for short volatility strategies. Jay made the point that there has still been a spread between expected versus realized volatility. In other words, if we are selling volatility at an eleven price but the market only trades at a seven level, the strategy can still realize a profit.
The central theme of a low volatility regime has been in the news for some time. The Wall Street Journal in their Daily Shot piece had an interesting graph which showed the highest yearly intra-day high since the early nineties.
Source: WSJ Daily Shot and Driehaus Capital
The graph points out that the VIX’s intra-day highest print was 17.28. Only 1995 had a lower intra-day high. A far cry from the 2008 intra-day high of 90. It is important to point out that this only goes back to 1992. Jay Pestrichelli was also asked his forecast for volatility in 2018. He pointed out that the market is not showing any signs that volatility is on the verge of normalizing or moving higher.
The key for the HIPOS strategy is to continue to be selective in entering new positions, staying disciplined in requiring rules be met for entry, and manage risk throughout the lifecycle of the position. Unlike other short volatility strategies, ZEGA prefers to be opportunistic when positions are on versus an always in the market approach.
Should anything change we will be back on the blog with updates. Until then, on behalf of ZEGA, Happy Thanksgiving!!!