HIPOS Weekly Update: Waiting for Time Decay

by | Oct 12, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), Option Trading, Volatility

Another 5 days have passed and the Russel 2000 Index (RUT) has been relatively unchanged. However, the price of the HiPOS call spread has had significant time decay over the past week dropping from $1.15 to $0.50 after Wednesday’s close.

The reason for this is twofold, one, the sideways movement of the market is increasing the position’s probability of NOT going above the 1575 level. Said another way, if the market doesn’t rocket up like it did in Aug/Sep, the RUT won’t hit our short strike of 1575.

The chart above illustrates that point. As a reminder, we want to stay within the purple curve, in this case below the curve, and the sideways market keeps the odds of popping up above it less and less each day.

The second reason for the time decay is that volatility remains low. The market continues to experience levels of very low volatility. If that remains the same way through the November 3rd expiration, the position should not have any surprises.

One last note, we’re still on the lookout for a put spread which would take advantage of a spike in volatility by selling another spread, but on the bull side. As you probably recall from our other posts, we only used half our available funds for this trade, and if the opportunity arises to put that to work, we will do so.