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HIPOS Weekly Update: The Federal Reserve Rally?

Markets this morning opened somewhat flat or sideways after yesterday’s strong rally.  The rally seemed to align with Federal Reserve Chairman Powell’s comments around the trajectory of future rate hikes.  The move higher was welcome for our short NDX put spread position that expires on December 21st.

With 21 calendar days left (15 trading days) until expiration, the underlying Nasdaq 100 Index (NDX) sits roughly 20% above its short 5500 put strike price. You might remember from past updates the strategy tends to go where the higher volatility resides. At the time of entry, the Nasdaq 100 Index had materially higher implied volatility allowing ZEGA’s traders to find a position that delivered the required return versus the risk of entry and at a much further distance out of the money.

Some advisors and clients have been surprised by the distance from the NDX price to the short strike. That is a product of how much higher volatility has been of late. The higher the volatility, the further away we can get on trades that still qualify based on our strict calculations for entry. A far cry from what many of you experienced in the low volatility of 2017.

Moving forward you and your clients will continue to want the market to remain above both our short strike as well as our defensive posture line indicated above in purple. You also want time to continue to tick off which reduces the premium remaining in the spread.

We will check back in next week with another update.