HiPOS Conservative Trade Update

By Derek Moore

HiPOS Conservative Trade Update

The S&P 500 Index (SPX) made yet another new all-time high today.

It closed 15.3% above the short 5100 put leg in our spread. This is how far the spread is out-of-the-money (OTM). This is a positive as the SPX is pulling further OTM which along with time decay, increases the current unrealized profit in the trade. Of course, we still have 16.5 trading days until expiration, but so far so good.

Not pictured in the graph, it’s also worth noting that volatility has also been waning which also is beneficial in reducing the value of the short put spread.

Eventually, we want the value to move towards zero and expire worthless to realize a full profit.

Reviewing The HiPOS Graph

The ZEGA Risk Curve is shown in pink.

As the market has risen, it has moved further and further away from the ZEGA Risk curve. At the same time, the curve moves down and to the right as we get closer to expiration date. This reflects the positive time decay inherent in short volatility trades and the increasing probability of the trade expiring worthless so long as the market is not too close to the strike. Remember, there is still time left before expiration.

The short 5100 strike is outlined by the dotted papaya line, expiration date of December 20th is the vertical blue dotted line, and the candlestick chart of the SPX.

What Are You Rooting For?

Hey, we’ll take more all-time highs!

The good news is given the distance between the SPX and the 5100 short put strike level, the market has a good amount of breathing room meaning even if it turns lower, that may be fine. The market doesn’t need to go up for a HiPOS trade to realize a profit, it just must not go down by too much. What you don’t want is a move sharply lower towards that strike price area.

You do want the calendar to continue to tick by to realize more and more of that time decay.  

One of the things you may realize looking at that HiPOS graph is as the distance towards expiration closes, the market has more room to breathe as the ZEGA Risk Curve drops down.

This is why we often mention the early part of the trade can have a little more peril than later when those distances open. You also would ideally like volatility to remain steady or even move lower. As volatility drops, the volatility premium within the price of options also lessons.

We’ll leave it there, but I’d encourage you to click on the link below to check out more information and presentations on HiPOS including the risks and benefits. https://zegainvestments.com/products/hipos