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HiPOS Update: Slow and Steady & Repair and Replace

By Derek Moore

HiPOS Conservative: Slow and Steady

With two calendar weeks and 9 trading days to go the S&P 500 Index (SPX) sits about 8% above or out of the money from the 4075 short call strike. Today’s small drop in prices within the index proved helpful in continuing to show unrealized gains in the spread position.

As we can see on the graph above, the SPX is positioned both below the short strike price as well as the curved purple line. As we normally point out, that line continues to move higher and higher thus provided more room for the index to move around in price. In cases where price does breach that line, the ZEGA traders would look to potentially enact more of a defensive posture in the trade.

Given that quite a bit of the target profit has been gained (on an unrealized basis), some advisors have asked whether we would take that position off early? The quick answer is it depends whether the pricing our traders could execute at was beneficial enough for your clients. But it also may depend on the availability of a new spread position to roll into.

The other question we get is around adding a short put spread to this position. That possibility does still exist should markets sell off a bit with an increase in volatility. While time works for us providing ample time decay as the calendar ticks by, it also starts to limit opportunities to layer in the other short side for the very same reason.

We will update everyone with any adjustments or developments but for now you are continuing to root for the market to drift, go lower, or move higher in a controlled manner.

HiPOS Aggressive: Repair Mode

Since our last update earlier in the week where we hinted at further adjustments, ZEGA’s traders yesterday executed another step of a few potential steps in repairing positions within the aggressive strategy.  So, lets outline where we stand on the positions and what lies ahead.

Yesterday we employed a tactic many of you may not have seen before where an index swap was executed on ½ the remaining position. Basically, we took ½ the remaining short Russell 2000 Index (RUT) spread and swapped it into a short S&P 500 Index (SPX) spread. We also moved the expiration up to January 20th from January 22nd.

Why? First because the requirements were roughly the same for holding the position. The new position also was able to preserve or harvest about 60% of the premium from the RUT spread we closed out. The second reason was that this diversifies the strategy between the RUT and SPX where we have seen some heightened divergence of late.

Current Positions:

RUT Short 2275/2305 Jan 29th exp

SPX Short 3820/3845 Jan 20th exp

What lies ahead, the next step in the repair process could involve adding some short put spreads within each respective index to bring in additional premium creating Iron Condors.   Or we may take the existing positions and roll them out in time again for either defensive reasons or to increase the premium credits to your client’s accounts.

As we mentioned this repair leg of the strategy did increase realized losses with further actions planned to potentially recover a portion of those.

As always, we will update everyone with any material further developments as we move towards expiration next week Wednesday for the SPX spread and RUT expiration on Friday the 29th of January.