By Derek Moore
After our last HiPOS position expired at full profit the ZEGA trading team is hard at work scouring the market for a position that would qualify under our strict rules. However, that has not materialized yet. One reason is that volatility as illustrated above in the VIX Index chart, has shrunk of late.
That and the overall markets have been meandering above and below their most recent levels. Most likely we’d expect to be sitting in cash for a bit until market conditions are riper for a trade. This most likely means we would need to see a few down days in a row for premiums to become advantage for us.
We mention from time to time that we also look at the short call spread side in addition to the short put spread side of the trade. Often the put side qualifies while a corresponding call side trade does not. With markets once again within all-time highs this question has come up recently.
Remember that HiPOS is a non-directional short volatility strategy. We do not try and time or pick market direction. If a call trade presented itself that would be of interest since the market generally does not experience sudden outsized up moves like they every so often do on the downside.
Before we leave this week’s update its worth mentioning again that our own internal calculations resulted in a more conservative trade last time around. This showed to be a prudent decision as during the last trade markets did sell off shortly after we entered into the trade. Never enough to seriously jeopardize the position, but had we not gone more conservative the unrealized market prices of the spreads would have gotten worse during the pullback than what you and your clients experienced.
If market conditions should change and a new trade arise, we’ll be back with an update. If not, we will be back with another HiPOS update next week.