HiPOS Weekly Update and Podcast: Jay and Derek Discuss HiPOS Characteristics

By Derek Moore

This week we’ll be discussing the current HiPOS trade as well as highlighting the most recent podcast where Jay joins me to discuss the strategy and common questions we get. The link to play right from the article will be displayed below.

With the close of trading Monday our HiPOS position marched closer to the August 2^nd expiration. With only 8 trading days left, you might have noticed on an unrealized basis that the positions have shed around half its value. Since we are sellers of premium, losing half the value is an unrealized gain for us as we eventually want the position to go to zero to reach a full target profit.

This shift in value happened despite the index itself being lower than where we placed the trade. Two points to make here. First, since this was a shorter to expiration trade, the passage of time since entry represented a greater percentage of the overall days left in the trade.

Remember, time decay can erode quickly as you move towards that last week of a trade. Second, we also saw the trade go through a whole weekend with no market movement. Speaking of market movement, while the underlying index is lower than at entry, it has not moved far enough relative to remaining expected probabilities and current volatility levels.

Put rather simply, the index didn’t move enough to affect the trade negatively and the passing of time gave us positive time decay. Over the next week we would expect the erosion of value to move a little slower as there is still some pent-up volatility due to ambiguity around the upcoming Fed Meeting.

HiPOS Podcast

Finally, Jay Pestrichelli joined up with me once again on a podcast discussion. I think you’ll enjoy this one as we cover HiPOS in general but also get into who takes the other side of our trades and why we sometimes need to remain in cash waiting for the right opportunity. We also talked about how probabilities adjust based on where volatility is. You can click the play button in the player below to listen:

The show notes for this one included below highlight various topics explored:

Using probabilities to generate short high probability option positions
Expected underlying index moves based on varied levels of implied volatility
How large investment banks take the opposite side of the trade looking to reduce Value at Risk (VAR)
Difference between being patient for opportunities versus and always in the market strategy
What happens to option spreads when markets sell off?
Value at Risk VAR impact on institutional hedging as dynamic volatility hedging increases
Why sell options on large diverse indexes as opposed to individual stocks
Netflix example of implied volatility right before earnings and expected moves
Single stock risk using Netflix and Disney examples of over 10% moves down after announcements

Well that wraps up this week’s edition of the HiPOS update. We’ll be back next week with another update. Until then enjoy the rest of the week.