HiPOS Weekly Update: The Iron Condor Has Landed

By Derek Moore

Today is expiration day for our short iron condor position in our primary HiPOS strategy. As you might remember this started out with just a short call spread but due to a volatility spike and drawdown in the S&P 500 Index, we were able to add a short put spread to the equation.

Recently we put out a piece titled “Splitting the Difference” as we wanted the underlying market to remain nicely between the two short strike levels above and below the market as shown on the graph above. Well, the S&P 500 cooperated and at the close today we should realize a full profit on the position.

The benefit when both sides qualify at the same time is that we can generate premium from each while also seeing increase time decay benefit towards the total value of all the legs of the spreads. The difference for many of you is what you are rooting for. You do not want the market to move higher or lower too much too quickly.

So, what about the next trades? Not to worry, ZEGA’s traders are already scanning the volatility landscape to find potential new positions both on the call and put sides. One of the positive aspects of an elevated volatility regime is that generally it becomes easier to go from one trade to another. Higher volatility means that we can find trades that might be shorter in duration and further out of the money.

Looking at the chart of the VIX Index below, we can see while not at the yearly highs, we have been higher for much longer than probably the 2008-09 period.

As recent as this morning, the VIX had hit the 35 level. With implied volatility this high, premiums are more robust as the options market believes there is a greater propensity for higher daily moves than say 2017 when volatility was near all-time lows for quite a long time.

For now, we will leave the update here but will be back next week with another post should we move into a new position. Also, Jay Pestrichelli and I just recorded a new podcast episode that should go up on the blog sometime Monday. This one talks through the VIX Index, how we are elevated compared to past regimes, and implied volatility in the markets as a gauge of future volatility.