HiPOS Weekly Update: Uncorrelated When You Want It?

By Derek Moore

HiPOS Conservative Expiration Day Is Here

Today our primary short put spread expires worthless for a full profit.

What you’ll see over the weekend is the positions will be removed with a “removed due to expiration” notation in your transactions. To realize a full profit, you want the position to expire worthless as we’ve sold the spread for a credit at the onset. When the trade is initially placed, that credit comes into the account adding to the cash balance.

At expiration (when positions go to zero), the equity in the account reflects the gains.

Uncorrelated Returns

We point out that HiPOS offers the potential to realize income in up, down, and sideways markets.

We always point out that is the case so long as the underlying market doesn’t move too far too fast in the direction of either our short put spread or short call spread. September was a good example of a market meandering before selling off post Fed announcement. Because the S&P 500 Index never threatened the short put strike, positions remained profitable despite the overall markets moving the other way.

Currently it seems we are in a regime where bonds and stocks are highly correlated.

As interest rates have risen, it has put pressure on equity markets where both stocks and bonds have moved lower recently.

I’ll point out that in addition to historically being un-correlated to equity markets, HiPOS tends to be un-correlated to interest rates as well. Non-correlation is where one asset or strategy (HiPOS) is moving up in this case while other assets are moving down.

There are times of course when HiPOS is moving lower while equity markets are also sharply lower, but in September it was nice to capture some un-correlated returns.

What About Next Trade?

ZEGA’s traders are always surveying the volatility landscape.

Currently we’ve seen volatility spike over the past few weeks as we can see in a 6-month chart:

Source: CBOE

When the implied volatility is elevated, we’re able to more easily find trades that qualify under our strict rules for entry. We also can often find trades that are further out-of-the-money or closer in time to expiration. Typically, we’re able to go from one expiration to new entry without much time in between.

Once a new trade is put on, we’ll be back with another update.

Until then enjoy the weekend!