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HiPOS Update: How the Strategy Can Offer Returns Even When the Market Pulls Back

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

By Derek Moore

The last 4 trading days have seen all but one drive lower. The S&P 500 Index is also now down 5.4% from the most recent all-time high.

S&P 500 Retracement -5.4% From All-Time High

  • Jay Pestrichelli was quoted talking about this very aspect in Barron’s  over the weekend “I do not think we have seen the bottom yet in stocks, while September’s stock market declines were uncomfortable, they were far from a traditional 10% market correction.”
  • This is one of those examples of how HiPOS has the potential to deliver positive returns when markets up, sideways, or down. So long as markets don’t move too far down too quickly. As Jay pointed to further retracement from the open on Monday did play out.

HiPOS Remains in a Comfortable Position Despite Selloff

  • Despite the selloff, the distance between the current index level and the short put strike is about 17.5%. The price level is also well above the purple defensive posture line. A big part of that is how far along we are in the trade and the remaining days to expiration being only 9 up to October 15th (expiration day).
  • Quite a bit of time value has been removed already and will continue to be drawn out of the remaining premiums in the position.

HiPOS Place in Portfolios

  • If a client qualifies to use HIPOS Conservative, the right client might have up to 20% of their portfolio allocated to the strategy. This is a good example of where the market is off, but HIPOS is up over the same time frame.
  • The goal is to offer a satellite strategy that pairs well with our hedged and buffered equity strategies offering non-correlation at times.

What You Are Rooting for In the Trade Going Forward

  • You want time to tick away and get through the next 9 trading days without the market suffering a material adverse drawdown that would threaten both the short strike and purple curved line.
  • HiPOS is built to be able to withstand a waffling market. Ideally you would like also want volatility to remain elevated at expiration to set up the next trade. For now, let’s just concentrate on this one.

Even after the recent drawdown in markets, HiPOS conservative is sitting with an unrealized profit. We’ll call it a wrap for this week, but we’ll be back next week with another update.