By Derek Moore
With the HiPOS Conservative trade, it is doing what it was designed to do. Allow for fluctuation in the underlying index while seeing positive time decay tick off as the days pass. This position has an end of month or January 29th expiration date to be exact.
Looking at our typical graph above we can see that the S&P 500 Index (SPX) sits roughly 7% below the short 4075 call strike within the spread. The SPX also continues to be below the defensive posture purple curved line. This is where our traders may take additional take a more defensive stance to manage risk within positions.
With 17 calendar days (and 12 trading days) to go you and your clients want the market hang here or drift higher. So long as it does not make too fast a move much higher that would threaten the short strikes.
The other aspect of this position that would grant additional relief would be if volatility were to make a run lower. We know that the VIX Index has remained steadily above the 20 level now since the end of February. Since we are short volatility in HiPOS, retracements in implied volatility levels can also be constructive towards the value of our spreads.
Of course volatility remaining above historical averages is also beneficial in that more opportunities to sell volatility exist for us. We will continue to update everyone over the remaining weeks in this current version of the trade.
HiPOS Aggressive: Reduce and Roll
Yesterday saw some activity in the aggressive version of the strategy designed to reduce risk while keeping some dry powder to capitalize on a fresh position.
Roughly half the account value was converted to cash yesterday. That will leave about 1/2 of the spread positions on. Today we will start rebuilding with available cash generated to take in additional premium. The remaining 1/2 we will continue to manage and potentially roll out past this week’s Friday AM expiration.
The rationale behind these adjustments was despite the unprecedented new highs on the RUT, it just is not prudent to stay in a full position against it any longer. The last two trading days both gave it (RUT) a chance to retrace and it fought it off rallying from the lows of the day.
Our concern is that we get a strong up day and put both legs in-the-money, it makes it very hard to trade out of at prices available. So, to have the entire account hamstrung, we are getting half to a safe spot for today.
The reason we are leaving about 1/2 of the of the position is because many of our rules are still in a constructive state and tell us this trade will end out of the money. Leaving some on as a partial recovery was a compromise between what we are experiencing in today’s market dynamics vs. our historical data that drives our rules.
The remaining piece was adjusted this morning where we rolled out another week to the January 22nd expiration. We did this for a few reasons. First, unlike this Friday which had a morning A.M. expiration, the following Friday is a P.M. settlement which allows us to be able to trade right up to the expiration that afternoon. Second, this again creates more flexibility for us in managing the position where rolling now given our calculations was more beneficial than waiting.
HiPOS Aggressive, as we discuss often with advisors, is a volatile strategy. This is why we recommend a smaller allocation for appropriate clients based on evaluated risk tolerance. As a satellite strategy often paired with our long Buy and Hedged Strategy or ZBIG Buffered growth, markets moving higher have been very constructive in advancing the balances in the core offerings.
As we move forward expect some combination of a new allocation for the cash sleeve, we freed up with a potential roll forward and up in strikes on the remaining position. This will depend on the movement of the underlying index.