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HiPOS Weekly Update: Environment for Short Volatility Is Pleasant

By Derek Moore

Status of Current HiPOS Conservative Trade

With 5 trading days remaining until the expiration on May 19th, the markets have continued to trade within a range.

As the title insinuates, sideways is a nice environment for HiPOS. Time decay erodes like ice cubes melting on a hot day. With each day’s passing, the probability of the market reaching the short put in our spread drops.

Given the “pleasant” environment, the current spread has almost reached its full (albeit unrealized) profit.

Recapping Our HiPOS Graph Above

Building on the sideways trend post trade entry, we see that as time passed the purple curved line trailed off down and to the right.

This is the area where should price drop below it, ZEGA’s traders may take a more defensive posture. Each day that passed saw that curved line move further and further away as price remained relatively stable in its range.

At the time we are writing this, the S&P 500 Index was sitting just under 15% above the short 3500 strike.

The more out of the money distance, the better!

What Are You Rooting For?

In this final week, more of the same.

You just don’t want a sharp reversal where markets accelerate with outsized moves to the downside. Given that most of the potential unrealized profit has been made, you shouldn’t expect much change in the value of positions this week. If markets cooperate as they have been, once expiration day passes the remaining unrealized profit will be realized.

This corresponds to when you see positions removed due to expiration in accounts.

I’ll add that ideally markets calmly finish out next week, but volatility ticks up towards the end.

This would help us find the next HiPOS position that qualifies. Off course the team is already running the numbers in preparation. We’ll check back in next week with another update.

Enjoy the weekend!