HiPOS Update: Not So Fast

By Derek Moore

With a week to go until the morning expiration of the primary HiPOS conservative trade, the market has settled back into a slower trajectory forward.  As such, you may have noticed that much of the extrinsic time premium has also faded. Remember, you want the value of the spreads to eventually get to zero or worthless as we are net sellers of premium at the start of the position.

If we look at our typical graph above, you will see how the “vaccine spike” tried to breech the purple curved line but never quite got above it. We normally refer to this line as an area where we may take on a more defensive posture. This does not exactly mean we would close out a position. Depending on where we are in the cycle or timeline of the trade, it might mean we look at options to roll to other strikes or expirations.

Other times based on our calculations; it may lend us to be patient so not to be whipsawed by the markets.   Time is on your side with HiPOS, both because of the natural tendency for time premium to erode but also the more time that goes by, the more the trade has room to maneuver. You can also see on the graph how the purple curved line continues to be draw higher and higher towards expiration.

So, what should you look for in the next week? If the market stays here or lower you most likely should not expect much movement in the remaining value of the spreads through expiration. Some asked if we would be able to employ the tactic of legging into a short put spread to create an iron condor. While it looked like a possibility as markets sold off Thursday, it never got into a range that qualified by our rules.

Given the increasingly short time to expiration, this remains a lower probability. Instead, the trading team will monitor this position as always.

HiPOS Aggressive

A quick note about the Aggressive version of the strategy. With heightened volatility the traders have been utilizing shorter duration trades moving in and out of the market in quicker opportunistic bursts. Some of you might have noticed even a 1 day to expiration trade.

The latest version included a pair where we were long an S&P 500 Index call spread and short a Russell 2000 Index call spread trade. When we pair positions like this the long alternative index spread is there to hedge systemic market risk, in the direction we have sold premium. Expiration day for that construct is today and is expected to end up with a full realized profit.

So, we will end the update here but of course be back next week with another briefing.