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HIPOS Weekly Update: December Volatility Swoon

Source: VIX Index Chart Yahoo Finance

By Derek Moore

As we edge closer to the Christmas and New Year’s holidays, we’ve seen markets rally and volatility subside. Looking at the VIX Index chart above, you’ll notice that implied volatility is trading at the bottom of its 2019 range.

You might remember our most recent HIPOS trade was able to be closed out after only a short time at near a full profit. Our traders have been keeping a keen eye on new trade opportunities but thus far none has satisfied our strict rules for entry.

You can see how high the VIX Index was coming into the year on the back of the December market lows. Although the memories of that selloff are still fresh, often December can be a time of reduced volatility in markets. Lately we’ve seen renewed news suggesting reconciliation of the trade dispute with China, the Brexit or rather British election signaling a little more certainty, and recession fears assuaged with the recent round of economic news.

2019 has proven to be a good year for HIPOS as a complimentary piece to portfolios. This is especially true when added to a portfolio paired with allocations that are hedged or buffered long side strategies. Volatility was elevated at various points providing opportunities for new positions.

With the market again making all-time highs often we get questions about looking for a short call spread instead of a short put spread. As a reminder, this strategy can use either or both at the same time (Iron Condor Position) provided they meet our rules. Often as regular readers know the call side simply doesn’t qualify and doesn’t have enough “juice” to be worth the squeeze.

As we wind down the trading year in HIPOS, unless the markets give us an opportunity, we would expect to be in cash a bit longer. Should conditions set up favorably for entry we will off course be back on the blog with updates.

One final note: recently we’ve heard comments in the financial media about how premiums on the put side were priced unbelievably high. Or that the skew difference between puts and calls equidistant below and above the market was hyper elevated. Our own calculations have not shown that to be the case. This also was evident by our ability to close out our last short call spread at .10 cents with a few weeks until expiration.

The volatility space can be complex at times which is why choosing a manager that constantly runs the numbers and monitors markets is valuable.

On another note, we hope everyone has a safe and happy holiday week!