HiPOS Weekly Update: All About Price and Time As Markets Run Higher

HiPOS Conservative Trade Update

As the markets closed at another all-time high, the call side of our short iron condor has crept up closer to the short 5100 call strike but remains just above 5% out-of-the-money. With today’s session in the books that leaves another 14 trading days to go before the February 9th expiration date.  What this means is that while the short put spread has an unrealized profit, the short call spread side has an unrealized loss thus far.

Part of the reason is that while the time decay benefit is still helping the call side, there is still a bit of extrinsic or time premium left in the prices.

I always point out that options are based on price, time, and volatility.

Unlike when markets are selling off, an orderly run higher doesn’t see a jump in implied volatility. That means that the price of a spread is mainly, on the call side, determined by the price of the underlying market and how much time to expiration remains. If you look at accounts, you’ll notice a small unrealized loss but should markets retrace, or more time ticks by, prices potentially could abate (what you want).

We’ll touch on this more in our normal what to root for section.

Reviewing the HiPOS Graph

Above is our normal graph, albeit with the purple curved lines both above and below the market. Those lines represent areas where if prices should go above or below, ZEGA’s traders may take a more defensive posture to further manage risk. It’s clear that the S&P 500 Index has moved closer to the 5100 short leg of the call spread and away from the short put spread. But it is still under the purple curved line which is what you want. The current trade was different in having both a short call spread and a short put spread on at the same time but if that throws you, just take each side on its own to simplify things.

What are You Rooting For?

First, you want the market to move lower or drift sideways for a bit. This would take some pressure off the current price of the short call side. Remember, as sellers of volatility, you sell premium and eventually want the value of the spread to melt away to zero. You want time to tick by to reduce the number of days until expiration thus reducing the time premium  (extrinsic premium) left on the positions. Implied volatility isn’t as much of a factor currently as I  mentioned earlier, so the main thing would be if the market moved lower to increase the distance  out-of-the-money which would cause the premiums to drop. With the iron condor, you may find yourself saying go up, no go down, but not too much, no go up…

Just refer back to the chart and to keep things simple, you’d like the price to be as much as possible  in the center of the two purple lines which means it would be nicely away from either short spread  above or below the market. We’ll end the update here but as always reach out to a member of the ZEGA team with any  questions or to see where short volatility strategies may fit in portfolios.