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HIPOS Weekly Update: Market Experiences Wide Swings but Remains Above the Risk Curve

By Derek Moore

Last week the market experienced more volatility than many have grown accustomed to. The price candles on the chart above show a greater range between the highs and lows many days. This intra-day volatility continued into Monday’s session.

Since our last primary HIPOS trade expired successfully, the S&P 500 Index is off around 133 points or just north of 4.5%. You might remember we entered the current position last Tuesday after the market had already pulled back a bit and volatility increased.

Despite the swings in the markets the underlying S&P 500 Index has remained above our purple defensive posture line. This is a positive. If that line is violated, the ZEGA trading team may take additional measures to further control risk.

Sticking with the purple curved line, you’ll also notice that the further we get away from the date of entry and towards expiration day, the lower it drops. This syncs with how being short a spread position and it experience a benefit as time goes on. In other words, each day that passes, even weekends and holidays like Memorial Day on May 27th, where the market will be closed, the trade earns time decay.

We know that it has been a while (late December), since many of you have seen this much intraday volatility. It is also a good reminder of why we have rules for HIPOS which include a required distance away from an index level where we sell the short leg of the spread. This is done to keep the HiPOS positions from assuming too much risk during times of lower market volatility.

One additional note, in this trade’s case the rules played a slightly different role. By only targeting a 1.2% return on the trade, it helped push the short leg even farther away from the market than what the out-of-the-money internal trade rules called for.  Therefore, we are taking even less risk when the volatility was higher.

We will check in with everyone next week for our regular weekly edition of the HIPOS update. Of course if anything should warrant a pre-week update we’ll be back on here with the details.