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3 Ways Current HiPOS Trade Is Working & How Advisors Can Explain It to Clients

HiPOS (High Probability Options Strategy) Option Trading S&P 500/SPX

By Derek Moore

We know that many advisors using the HiPOS Conservative strategy are looking to better explain how underlying market movements and changes impact the prospects for current positions.

This week’s update will explain the 3 things that are causing positive impact resulting in unrealized gains. This includes time, volatility, and underlying index movement. Below we will highlight each of these areas so you can develop a greater understanding of what to look for.

Each of these areas tell a different story and they don’t always move in the same positive direction.

Positive #1: S&P 500 Index Moves Higher and Further Out of the Money

  • Short 3700 strike moved from 16.5% OTM to 22% OTM – more distance away means less probability of being in the money at expiration and thus reduces this component of option premium
  • Index moving higher creates more space between price and the purple defensive posture line

Positive #2: Less Time to Expiration

  • Trade now has 14 trading days left compared with 22 days when initially placed
  • With less time to expiration more time decay has come out of premium.  
  • Includes Labor Day market holiday (1 less trading day)

 Positive #3: Reduction in Market Volatility

 As markets made another new high, volatility dropped

  • Higher volatility means premiums are more expensive
  • As volatility moves lower, this component sees a reduction in volatility related premium

 Explaining These Changes to Your Clients

To fill in the blanks thus far in the trade there haven’t really been any negatives and your clients should be showing an unrealized profit.

The reduction in volatility, time to expiration, and rise in markets further above the short strike all working to lower premiums. Since we sell premium via option spreads, this is a welcome development. Plus, early in the trade, price moved away from the purple line giving the index more room to breathe.

This is exactly what you were rooting for.

We will be back next week with further updates in our effort to educate you and your clients.