HiPOS Weekly Update: Double Hammers In Sideways Action

By Derek Moore

HiPOS Conservative Update

With 18 trading days to go until expiration after market close on Monday June 3rd,   despite a little momentary down move, the S&P 500 Index (SPX) reversed over the past two days forming two hammers.

A hammer is a candlestick pattern and while these weren’t perfect, typically you see them when selling flips as buyers come in. The market is essentially a smidge higher in a bit of sideways action. This is good news as sideways is great.

It allows for some time decay to start positively helping the market price of the open short put spread.

HiPOS Graph Update

Above we see the SPX price action since entry.

The distance between price and the short 4650 strike (horizontal orange line) settled around 12%. This is the out-of-the-money (OTM) distance while the vertical dotted line illustrates the June 28th expiration. The purple curved line moves down and to the right the closer it gets to expiration day.

This helps illustrate how each day that passes sees additional time positive time decay.

You want price to stay above that purple curved line as well as the short 4650 short put strike level.

If the market should close below those levels ZEGA’s traders may take a more defensive posture to further manage risk.

What You Are Rooting For

The market doesn’t need to go higher for the strategy to potentially realize a profit, but it certainly helps.

Sideways action like we have now works well as it helps reduce the value of the short spread. As net sellers of premium, you want the value of the spread to eventually get reduced to zero and expire worthless. The other thing you want is for volatility to remain subdued. The higher the volatility, the more robust option premiums can be.

It appears that we are currently in a lower volatility regime.

The day the trade was put on, it took advantage of a short-term pop in implied volatility. This is part of the opportunistic nature of HiPOS.

For additional information on the HIPOS strategy check out the presentation : ZEGA HiPOS Strategy