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Strategy Update 4-2-20

By Jay Pestrichelli

Here is a quick strategy Update.


We are beginning to see implied volatility and actual volatility start to come back in line. For those of you that read our post on March 13th, (click here), you may recall we pointed out that the return for HiPOS wasn’t commensurate with the risk the positions took. I used Google Maps as the illustration.  However, in recent days, we’ve seen the implied risk and the realized risk come in line and the graph below helps illustrate that as the orange line is no longer disjointed from the blue line.

If this normalization continues, HiPOS investors should expect to see some entries next week. We’re still concerned about execution efficiency without the open outcry pits staffed. However, we’ll stay disciplined in our methodology and not chase illiquid prices in the electronic market. We’ll update as needed.

Buy and Hedge Retirement:

Today we started the next phase of our “re-investing avoided losses” program by adding some new long calls on the S&P 500 out to June 2021. This constitutes about 1/3 of the eventual position we plan to re-establish at these lower levels. The concept to remember is that hedged equity strategies work best when their avoided losses are re-invested. This means taking advantage when losses are less than the market by adding exposure after a sell off.

Today’s entry was the 3rd phase of this activity. The others being a rotation of our income portion to a tightly hedged high yield fixed income position, and a short-term bounce trade placed back in early March. All of these position adjustments are designed to capture a market rebound some time by 2021, but still limit downside risk in the event that the recession lasts for multiple quarters.

So, with that we’ll draw an end to this short update. When we re-enter the HIPOS strategy we off course will post another piece with all of the particulars.