HiPOS Update: Bend But Don’t Break

By Derek Moore 

The Current Numbers That Matter

While markets have pushed lower, the NDX still remains about 15% above the short put strike of 10300.

After the close today, the trade will have 14 trading days left until expiration day. We’ll come back to that later, but we’ll also mention the VXN (VIX for the Nasdaq) will make a new high close for the year above 41. Right now, the increase in volatility is driving premiums higher and thus the root of current unrealized losses in positions.

You might also remember we rolled out further to the May 27th expiration on April 29th.

That added another credit to up the potential total profit target and only 2 extra weeks of time.

Since the roll, account values have decreased about -2%. You can read more about the roll here. This is the effect the increase in volatility levels and lower NDX level have had on the trade.

This brings us to our typical HIPOS graph shown above.

What The HiPOS Graph is Showing Us

Late in the day we can see the NDX is roughly sitting about 8% above the curved purple line.

This is the area that ZEGA’s traders may decide to take some defensive action. It’s worth noting that as the days go by, that line drops down and to the right. This is where time decay starts to come into play. We’ve said in the past, the worst time for a market to move significantly against HIPOS positions is very early on.

We are about midway now in the lifecycle of this current iteration.

What Are You Rooting For?

The most obvious might be for the NDX to stabilize or move higher.

That’s correct, but you want implied volatility levels to come back down. The higher volatility, the higher the probability of markets reaching the strike price by expiration date according to the math. Even though we only have 14 trading days left, the positive impact of time decay is somewhat muted due to the surge higher in volatility.

A combination of a firming or increase a bit in the NDX level combined with a recessed volatility level should see premiums reduce and start to show positive time decay each day we inch closer to May 27th.

We’ll end it there for now, but as always reach out to a member of the ZEGA team with questions.