Raising the Buffer: Talking Intra Maturity Strategy With ZEGA

By Derek Moore

For clients enrolled in the ZBIG Strategies set to mature in December 2019, positions were rolled yesterday to higher levels and moved out to the year 2021. The market’s run to near all-time highs, gave us an opportunity to lock in gains and move up the buffer level.

ZBIG, which stands for ZEGA’s Buffered Indexed Growth strategy, looks to create a downside buffer while capturing a portion of the underlying S&P 500 Index’s up move after entry.  For more information about ZBIG, click here on our ZBIG product page.

These accounts also saw a rotation from our High Yield ETF put spreads, which was used to synthetically capture dividends, back to short duration high yield defined maturity ETFs. This was done as the maturity date of the option positions is now switched from December of 2019 to December 2021.

The strategy, as we mentioned, is set to capture profits as the market moves higher from the time of entry and installs a buffer where losses from the stock market would not begin until the market is down more than 25%. Or in the case of ZBIG IRA, avoid stock market risk all together. The strategy merely carries the risk when there are excessive rates of default in the high yield market.

With the market running up from entry for many of these accounts, this group was ripe for an opportunistic adjustment to lock in gains and raise their buffer level. Let’s use a hypothetical example to explain. Suppose the market has appreciated and our hypothetical account has gained 13% since entry. If the market was to sell-off, that 13% could be given back along with the market declines. However, by raising the buffer, we’ve now reduced exposure to a stock market decline. The good news that if the market continues to appreciate, ZBIG will still go up along with it. Think about this as locking in gains at a high, but instead of going to cash, the account continues to have an opportunity for additional appreciation.

Again, this generally only applies to clients holding ZBIG strategies with the December 2019 (end of year) options. Other expirations in 2020 or 2021 have not experienced as much market appreciation. In other words, those maturities have been flat along with the market and raising the buffer doesn’t make as much sense.

As a side note, some accounts in our Buy and Hedge Retirement strategy, may also see some opportunistic risk adjustments. For accounts where the option Deltas have gotten close to parity with long stock, ZEGA’s traders may be reducing that notional market exposure to lessen the chance of giving up near 1 for 1 value if markets do retrace. We’ll update the blog accordingly.

As always reach out to the ZEGA team with questions.