HIPOS Weekly Update: Volatility Check Time

by | Jan 5, 2018 | HiPOS (High Probability Options Strategy), Technical Analysis, VIX, Volatility

Data Source: YCHARTS

As we enter 2018 volatility measured by the CBOE VIX Index is at historically low levels. Looking above at the chart we can see going back to 1990 where this current environment sits. So, what does this mean for a strategy like our HIPOS (High Probability Options Strategy)? Since we sell volatility far away from the current Index level, low volatility makes it more difficult to find trades which will qualify under our strict criteria. The reason being is that when volatility is extremely low, the premium available from the sale of a spread is depressed in value.

With the last primary HIPOS trade successfully expiring in December 2017, many advisors and their clients wonder when will we get a new position on? First, it is not unusual for HIPOS to remain in cash while our traders are running the calculations to find either a short put spread or short call spread that provides the right value relative to risk. On average since the strategy launched it has been in cash around 100 days per year.

When we think about the life cycle of the strategy, we enter a position. That position then is held until it hopefully expires worthless, thus providing a full profit. After expiration if a new trade qualifies right away it will be put on. If not, ZEGA will keep looking for one that does and only if that happens a new position will be put on. Sometimes a trade expires and a new one is put on within a few days. Other times it might be several weeks.

Sometimes you might notice we close out a position early when the opportunity arises to capture a benefit for your clients. In this instance, we normally have witnessed a position realize most of its target profit with the ability to roll to another trade that qualifies. The other situation which sees a trade closed early would be for defensive risk management reasons. Part of limiting those occurrences is only entering trades that qualify and have a greater probability of success.

Not all short volatility strategies are alike. Some are “always” short volatility, meaning they are never in cash waiting for a trade to qualify. Unlike those, ZEGA’s HIPOS looks to pick its spots. Only entering a short-spread trade when we deem it worthy of consideration. By being selective, often we get the benefit of being able to sell premium when markets pull back or see a short-term spike in volatility.

If something changes off course, we will check back in on the blog with updates. Until then if you questions reach out to ZEGA.

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