HiPOS Conservative Weekly Update: Wobbling Along

By Derek Moore

Well, Wednesday had a lot of the crowded trades potentially unwinding. I say potentially since it was one day and who knows what happens going forward. Yet Bitcoin, Ethereum, Lumber Futures, and more all saw selling pressure.

While the NDX (Nasdaq 100) ended the day flat, it showed some relative strength when compared to its index counterparts. In fact, while the NDX has been off its recent highs, it had been weak for a while even before our recent short NDX put spread position was established.

I mentioned last time that the trade needed some time to season. You can see on the chart above that the purple curve has now dropped off as it moves to the right towards expiration day. I call this having more room to breathe. As such, the current values of the spreads over time have settled in despite the index moving lower.

Speaking of the index, even with this recent retracement, we still sit roughly 15% above the short put strike. The price of the spread is around where we sold it at upon entry. There is still some time left in this iteration of our HIPOS Conservative strategy. Keep in mind due to the Memorial Day market holiday, only 11 trading days are left until the June 4th expiration day.

So, what are you rooting for? Well as the title says the NDX has wobbled a bit. More of that is fine as long as the index does not move too sharply downward in a short time frame. You also want days to tick off as each day that does provides a little more erosion of the remaining time value in the spread position.

The other thing that would be constructive here is for volatility in the market to wane a bit. This can be a complicated topic to cover in a short blog post. Yet volatility is one of the crucial inputs to how options are priced. So, let’s try and simplify. When you sell options, you want the value to eventually go to zero to reap your full profit target. Easy right?

The key part though here is that if you sell and volatility subsequently moves lower, the volatility component of your options price goes lower (positive). When volatility rises and you’ve sold options, the premiums also rise from that component (negative).

So, time and volatility, along with the underlying index price relative to the short strike are all things to root for. We are not suggesting watching the markets like the trading team at ZEGA does. Let us handle that. But now you are up to date. Until next week cheers!