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HiPOS Weekly Update: Distance out of the Money and Time Remain an Asset

By Derek Moore

Distance Out of the Money Matters

As we move closer to expiration day Friday, the S&P 500 Index is currently about 18% out of the money.

Out of the money off course represents the distance between the current price, and the short 3400 strike in the put spread we sold. When we put the trade on, it was already far out of the money due to the high implied volatility in markets. This distance is an asset as the further away, the lower the probability of being below that level by expiration.

This is a component that matters quite a bit, but it isn’t the only thing.

We Sell Spreads Which Have Positive Time Decay

With only 4 days remaining in the trade, most of the time decay has been taken out of option prices already.

This is a positive as we sell premium that we want to eventually decay to zero to realize a full profit on our positions. This week, barring a large move downward, you wouldn’t expect to see the remaining value of the positions change that much until expiration day. The distance out of the money does provide a good buffer against adverse moves.

While volatility remains high, the two aspects I’ve referenced have muted that element.

Walking Through Our HiPOS Graph

On our graph we see S&P 500 Index remained a good distance above the 3400 short put strike, and the purple curve.

This area represents levels where ZEGA’s traders may take a more defensive posture. As the trade progresses, the line moves down and to the right. Visually you can pick up how this allows more room to breath in the underlying index. Thus far markets have kept a nice distance above there.

While we are not yet through expiration, much like the out of the money distance, the market relative to the purple curve is also a constructive sign.

What Are You Rooting for Now?

This one will be quick with only 4 days left in the trade.

With what we’ve already described, markets can move around and go lower. You just don’t want any lunge lower with great magnitude. The market going nowhere (or up) while the calendar ticks buy works great as well.

We’ll be back with an update if warranted or when we put on a new trade.

For now, have a great week and as always reach out to a member of the ZEGA team with any questions.