HIPOS Weekly Update: Expiration Date Plus HIPOS Aggressive Update

By Derek Moore

June 24, 2019

Friday morning marked another successful expiration day for our primary conservative HiPOS strategy. The positions realized a full profit. As we noted the short put spreads were never really in doubt given that right after the trade was put on, the market pivoted off the short-term lows to trend higher.

This was a good illustration of the nature of volatility trading where sometimes a very short window provides a credit spread that qualifies under our strict rules for entry. Other times we wait patiently rather than force an entry that has a lower probability of success. While this iteration was put on directly after a previous expiration, you should be prepared for the strategy to be in cash for at least a week due to the lower volatility of June.

Off course markets can change quickly but we would be looking for a short-term volatility spike for the put side to qualify or our separate call spread rules to kick in which is possible given the market is once again at all-time highs.  Not to worry though, we’ll come back on with an update should the ZEGA trading group find a new position.

Aggressive HIPOS Update

Here’s an update for the group of clients in a HiPOS Aggressive allocation. Our Aggressive HiPOS version utilizes either a paired index long/short combination of spreads or several different short spreads which can be either puts, calls, or both at the same time. You can review the various strategies here https://zegafinancial.com/products/hipos.

Currently we are holding both short put spreads that has benefited from the market appreciation and a short call spread that the market has moved against. You probably notice that accounts are showing unrealized losses as the value of the short call spreads has ticked higher. Remember, when you are short spreads, you want the value to eventually get to zero.

With expiration day this Friday June 28^th, we have a few choices. One of which is to roll positions out a bit further in expiration and move the short call strikes higher at the same time. The idea is that while the accounts are marking at a loss, eventually the calls which come back down in value as markets flatten. Also, as we roll forward in time and out of the money, often we can pick up small additional credits along the way.

The short call spread trade is quite different in management from a short put spread. While dispensing of the more technical aspects, generally when short call spreads are being threatened by a move of the underlying index towards the short strike, volatility is staying level or falling. This is the opposite of the short put side which would typically see implied volatility surging against it.

Put another way, the short call spreads premium is not getting negatively inflated due to the volatility aspect where puts would. This is a benefit in that we have more flexibility to roll a position away from the current price. As always reach out to the team with any questions and we will be back next week with a new edition.