By Derek Moore
Today the ZEGA trading team acted on our current conservative HiPOS strategy position due to the market appreciation since entry. While this has not happened very often of late, sometimes when a position realizes so much of its available profit so quickly, it makes sense to take the risk off the table early.
Considering the position was just entered Tuesday, three days later it had made all but 2/10ths of a percent of its available profit. With an expiration date of December 27th, leaving the position on would mean keeping risk on for only a minimal additional amount of potential profit.
Let’s go through the math related to the trade, we sold initially for a credit of .54 cents and today paid .10 cents to close out. This results in capturing about ≈ 80% of the total possible gain in just a few days. This does two things. First, it makes a calculated decision based on the remaining risk reward that made sense for you and your clients. Second, it also allows the ZEGA team to seek out another new position should it materialize that would have a better risk reward ratio over the comparable time period should markets pull back in the short run. Should we find a new position, of course we will update you all on the blog with the details.
Lastly, this ability to be nimble is in part a result of the decision to pick our spots. Many might recall over the years ZEGA talking about waiting for the right opportunity before entering a position. In fact, historically, in a typical year, HiPOS might spend over 100 days in cash.
Because of this approach, when the market suffered its short lived two day pull back and corresponding volatility spike, we were able to put on a position as we were patiently waiting for our rules to be satisfied. Now with the market surge, as the trade went further out of the money and became closer to worthless (positive for premium sellers), we were also able to opportunistically close early.
The flexibility of a separately managed account (SMA’s), where we are not burdened with always have positions, result in more opportunities that might not be afforded otherwise.