By Derek Moore
HiPOS Conservative Expiration Week
In the HIPOS Conservative strategy this week marks the end of the current trade with Friday’s expiration. Looking at the graph above we can see that this iteration never really was threatened. The short call spread on the S&P 500 index remained below the short 4075 strike as well as the purple curved line that marks areas where out traders may take additional risk mitigation tactics.
Barring any truly outsized surge higher, you should not expect to see much change in the value of the spread between now and Friday’s expiration. In accounts, most have been marking at or near a full profit already with some variation.
Sometimes when they are marking so low, we get questions as to why we would not just close them out at zero to take off any unforeseen risk. The answer is that while the spreads may be marking at zero, the reality is that we would have to pay 5 or 10 cents to close it out and thus would reduce the positional full realized profit.
There are times when we are close to full profit very early in position where we might take positions off or roll early. But in this instance its better to just let it play out. Next week we will once again be looking at new potential positions on both the short and call side put on should they qualify.
HiPOS Aggressive: Living to Fight Another Day and Building Back
After a volatile few weeks, let me first update everyone on where we stand. As you know, we were forced to close out some open positions and roll others to reduce risk. Part of the ability to build back and regain losses in the strategy is maintaining capital to have those opportunities. So, after ≈ 40% drawdown, we now have positions on both the call and put side on the Russell 2000 Index as a short put spread on the S&P 500 Index.
Although the positions will not result in recapturing all the realized losses, they are a step towards chipping back away against them.
Our current positions all revolve around this Friday’s expiration. In the RUT we have a combo short Iron Condor where we are short the 2275/2305 call spread and short two different puts spreads. The RUT index is sitting about 2142 which is between the short call and the short put (the alley where the trades will both expire worthless). You will be rooting that between now and Friday afternoon that it stays nicely within this alley.
We have fielded a couple questions on when the strategy could possibly regain the realized losses? First, of course any time we have trades on we take risk and additional losses are just as possible now as last month. But to answer a question generally, with our price targets monthly barring other stresses in the strategy, we theoretically could look at an 8–12-month time frame. Those are only assumptions based on the volatility market and premium available to sell. They could wind up lower or higher from that.
HiPOS Aggressive has higher return targets and higher volatility. This strategy should be limited to a maximum of 20% of any client’s investable assets. This month end realized drawdown is the worst we have experienced in the strategy in the 10 years it has been running. On the other hand, 2020 was the best yearly returns in the strategy in 10 years. The ZEGA team will continue to look to build returns that are non-correlated to overall equity market in most times and offer a diversifying strategy as a satellite holding to your core investments.
We will be back next week with another regular update.