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HIPOS Weekly Update: Tricks or Treats?

After some real volatile trading sessions, today’s Halloween session marked the first time in the last 13 trading sessions that we finished up two days in a row. What was interesting with the market action yesterday was it opening lower to close near the highs. This reversed a recent trend of opening higher only to sell off late.

As we noted with the prior week’s update, the previous position was rolled forward and further away from the market to a trade that would have qualified upon its expiration anyway. Put another way, the suspended potential profit of the prior trade plus the potential profit of the new trade are embedded together in the current position. If this current position expires worthless on November 16th, your clients would realize both.

We know that rolling a trade forward is not something that many of you have seen ZEGA execute. However, as many regular followers of HIPOS know, we have many different rules for managing trades once they are on. One of those involves the relative distance of the market to an open short strike price. Sometimes in order to increase risk protections, we become more defensive in our management of positions.

As of the close today the short strike of 1325 sits roughly 12.5% below the current price of the underlying Russell 2000 Index. The move higher these last two days did two things. First, we saw implied volatility drop on the RUT which is a positive for the position. It also provided more of a buffer against our purple defensive posture line. 

We also moved closer to expiration day as only 12 trading sessions remain after today. As a reminder, time decay works in our favor as we are net sellers of premium. The closer the trade gets to expiration, the less time value it contains.

One question that came up this week was whether increased volatility means there would be less time between an old trade expiring and a new one being put on? The quick answer is yes. Off course we manage each position while they are on each and every day. But those of you who remember 2017 might recall us posting articles around how we were being patient to find trades that qualified and that normally meant a short-term increase in volatility. 

Back then we saw VIX levels hovering around 10. Today the VIX Index closed above 21. Higher volatility means that we can find trades further away from the price level of the broad indexes and potentially more premium available for your clients. As always ZEGA maintains strict disciplined rules for entry.

We will be back next week on the blog with an update. Until then, enjoy Halloween!