HiPOS Weekly Update: Countdown to Expiration Day

By Derek Moore

As we head into the long Memorial Day weekend, our primary HiPOS conservative position is ticking down towards expiration day. With the market holiday Monday, after today we are looking at only 4 trading days remaining for this iteration of the strategy.

Looking at our standard graph above, we can see as of the trade is progressing well sitting both comfortably above both the purple curved line and short put strike of 2225. Baring extreme moves in the underlying S&P 500 Index, your clients may not see much change in the remaining value in the spreads through expiration as it close to reflecting max gain. As of this writing, the S&P 500 is ≈ 25% away.

We mentioned last week that most likely ZEGA’s traders would not be able to find a qualifying call side short spread trade to pair with this existing put side trade. The reason was twofold: the short remaining time to expiration and the premium contained in those call strikes dealing with dropping volatility

While on a relative basis implied volatility is still elevated compared to 2019 levels, the contraction may not enable the selling of short call spreads above the market. Going forward, the put side should still provide ample opportunities for entry provided they meet ZEGA’s stringent entry rules.

One question that came up this week in addition to whether we would be able to sell upside call spreads was what would falling volatility do to the HiPOS conservative strategy?

One attribute you might have noticed over the last month and a half is how short the time to expiration has been on our positions. If volatility were to collapse, say a VIX below 20, you would expect to see trades placed with the more traditional 24-31 days to expiration.

Without getting to complex in the article, the higher the volatility, the further away (out of the money) we can place the short strikes. When volatility is high, we can not only get further away, but can collect the required premium from trades on shorter days to expiration that might normally need 30 days to expiration.

We will check back in after expiration day to let you know when the trading team has identified a new position. Of course, we will also update everyone should conditions warrant. Until then, hope everyone has a nice long weekend and enjoy Memorial Day.