HiPOS Weekly Update: A Time Decay Play

After what seemed like a steady march upward, the S&P 500 Index leveled out over the last two days following the Fed meeting. This slowdown provided some short-term relief to our current short call spread trade.  But despite this, you can see by the graph above the market has continued higher which hurts position values until expiration.

While the S&P 500 index price remains below the short call spread by close to 200 points, unrealized losses are reflected in the accounts. This is a good example of how the price of positions get quite stressed when moves happen earlier in the trade entry. The reason being is that not that much of the eventual time decay value has come out compared the underlying index appreciation. Option positions are now valued at a higher amount than the premium we took in when selling the call spread, thus the current unrealized losses showing.

This is a position that needs really two things: time to tick by to help reduce the time premium remaining, and the market to either drift lower or meander for a bit more so each day more value comes out. While of course a sharp decline would also help, many of your clients are using long market hedged equity from ZEGA as their primary strategies. Dramatic index declines would not be constructive for those.

There are some additional characteristics in the management of the call side that our traders must deal with. Overall, though given the higher level of volatility currently, larger swings in the daily value of the market are not unexpected.

For now, with the current trade, it really needs additional time to pass for the values to come back down or a pause in the rally. Should we make any adjustments in the position we will be back with more updates.