HiPOS Update: How the Trade Benefits from Markets Stabilization

By Derek Moore

Positions Move to Unrealized Gain

With the recent moves in the underlying S&P 500 Index, your clients’ positions in HiPOS Conservative have moved lower.

Since we sell volatility at the onset, you eventually want the premium on the short put spreads to go to zero. With a little over a week gone in the trade, some time premium has come out. Most of the benefit has resulted from lower implied volatility and the distance out of the money after the markets moved back higher.

Expiration is not until February 28th, but this was a welcome start to the position.

Reduction In Volatility

Typically, the implied volatility prices in the size of expected moves and any fear moves that higher.

As the VIX came off its highs, we saw overall premiums subside. Volatility is a major input in option pricing. Selling when it is elevated is one of the hallmarks of the strategy.

While we don’t expect the VIX Index to pull back to pre-covid levels any time soon, typically after some panic and fear it does adjust back to whatever the current version of normal is.

Markets Rebound and Stabilize

The distance out of the money of the S&P 500 also plays a big part in how our spreads are priced.

As you can see on our graph above, price staying above both the purple defensive posture curve and well above the short strike provided relief this past week. This is especially helpful early in the trade. The market does have breathing room as the S&P 500 sitting at a 4509 level means it rests over 21% above the short strike price.

This trade started far out of the money due to the elevated volatility levels which allowed us to sell premium further away and get the requisite amount of premium required.  

What You are Rooting For

While no one wants to get older, you want the calendar to tick by as each day that passes take more time premium out of the position.

We mentioned being more than 21% out of the money. So, this position has room where it can go up, sideways, or down provided it doesn’t more too far too fast. Since the current construct is a short put spread, a strong move higher might present us with the opportunity to add short call spread.

It’s not there yet, but there is still the possibility to leg into the Iron Condor. Plus, those of you with your core assets in Buy and Hedge Retirement or ZEGA Buffered Indexed Growth strategies would see the double benefit.

We’ll leave it here for now but will be back next week with another HiPOS Update.