By Derek Moore
While we just did an update last Friday, given that advisors and clients have been checking in on the status of our HiPOS conservative position it made sense to come back on the blog a little early to walk through where we are with the current HiPOS Conservative trade.
While the selling started in the markets Friday, it intensified into the close on Tuesday. Today we saw the market try to rally up before settling in at the close down a bit from yesterday. The VIX Index also retreated from its recent highs yesterday which potentially could offer a sign that expectations have firmed up a bit.
Our HiPOS strategy is not one that relies on picking market direction so in that said, let’s dig into where we are with the trade. As you can see on the graph above, the markets remain about 7.8% out of the money or higher than the short 2875 strike. The underlying market also remains above the purple curved line.
As a reminder, that line represents a level where if the market moves below ZEGA’s traders MAY use additional defensive tactics on the positions. Each day that passes and moves closer to expiration day (March 6th), the line drops lower and lower. Put another way, each day increases the amount of breathing room from potential defensive posture.
Speaking of expiration day. After the close on Wednesday, there are only 7 trading days left until the positions would reach their natural expiration. This means that more and more time value would normally come out of the trade.
Typically, in these situations barring any adjustments we would expect to see a good amount of time value come out as we get past the weekend and into the final week of trading. One of the benefits of the conservative version of HiPOS is that we start positions generally far away from the initial short strike price. In fact, at the onset of this position we were 13.8% out of the money compared to the 7.8% at the close.
Going forward we have a few things to root for here. First, we’d like to see the market either move higher or at least not have a few more days of down moves. Second, we’d like the level of volatility to subside a bit (not much is required) which will help the position to realize a more normal rate of time decay. Finally, you want to see the days on the calendar continue to move along as the closer we get to expiration day the better.
We’ll be back with another update towards the end of the week.