HiPOS Conservative Update
The Russell 2000 Index continues to make new all-time highs and move against our short call spread. However, we now only have three more trading days until expiration day on December 4th. Yes, it is December 2020 already! Time to start executing some Christmas shopping to find gifts for friends and family. One gift the market is providing our HiPOS trade is time decay (Theta). Selling volatility means bringing in premium but then hopefully watching it melt away much like holding ice cubes.
As of this writing the RUT sits just south of the 1840 level which is about 5% away from our short call strike price. You can see the visuals above on our typical HiPOS trade graph. As we always point out, the further towards expiration a trade gets, the more room it has. You can see how the purple curved line bends up and to the right.
This trade still has some work to do but we now have switched to an unrealized profit on the position. There are a couple reasons why the path has improved. First, volatility in general is getting pulled out of the market. The VIX Index hasn’t flirted with closing below the 20 level since February and it’s finally getting back there.
Then as previously referenced, time decay is kicking in along with the index retracing from its most recent 1862 level. In the next few days, you simply would like the market to hang around or go lower into expiration to realize a full profit. Last week as the market printed all-time highs we heard from some advisors as the value of the spreads went above the initial cost basis (what we sold them for). This caused your clients to show an unrealized loss.
From memory its been some time since a trade during its life went that negative so its natural to have inquires on the position. A few asked what the ZEGA trading team does? The decisions typically involve calculating several factors such as distance and time to expiration. Most times no action is the best prescription as the trade just needs more time to pass. Other times we might take more defensive action like adjusting the expiration dates or strikes. When we do those types of things, we would give an update. ZEGA has plenty of options.
So, this week let the ice cubes melt into expiration day Friday the 4th.
Last week we saw the aggressive spreads expire at a full profit. But with the HiPOS aggressive strategy, things turn around quickly as expirations are shorter time frames and have been stacked one after another lately. This is due to how much implied volatility has been present in the market over the past few months. Higher volatility means larger premiums, that are further out of the money, with shorter time durations. As we mentioned in the conservative version update, the VIX has been declining so you might start to see trades with longer expirations than we recently have been doing.
Today we started looking to get into another position. Most of the time, we fill the entire order in one fell swoop. Other times we might only partially fill and allocate smaller amounts to accounts. So, for those of you in HiPOS Aggressive you will see a small allocation today. ZEGA’s traders are currently working on additional opportunities, so sit tight and we will bring more updates later.
With that we will call it a wrap for this edition.