HiPOS Weekly Update: Give Me More

By Derek Moore

HiPOS Conservative Position Status

At the close Thursday the S&P 500 Index was a little over 20% above the short 3350 put strike leg of the open spread position.

What is significant there is how far out-of-the-money (OTM) the position is now. The OTM percentage represents the distance between where a market is trading and the short strike. While there is still more time to go until the June 23rd expiration date, let’s just say for now this is promising.

As a seller of out of the money spreads, the larger the OTM distance the better.

Accounts are seeing unrealized gains due to markets moving higher.

Plus, while each trade already starts out as a “high probability” of capturing full profits, expanding the OTM amount further increases the probability of the trade expiring worthless.

When you sell volatility, ideally the position values melt away and expire at zero.

Reviewing Our HiPOS Graph

If we look at our normal graph above, we can see how markets have moved higher after our initial entry.

You’ll also notice how as we tick off days on the calendar, the purple curved line slopes down and to the right. That line represents areas where if the underlying S&P 500 Index should close below, ZEGA’s traders may adopt a more defensive posture to further limit risk.

Think of it as breathing room for the positions and the more markets are above the line the better.

You also see the June 23rd expiration represented by the vertical line.

As we mentioned, there is still some time to go in this position, but we are off to a great start. We also mentioned above that >20% OTM amount. You can see how much distance there is between the last price of the market and the short 3350 strike.

Now that you are caught up on the particulars, let’s review what we want going forward.

What Are You Rooting For?

More of this please!

Let’s not complicate things more than we must. With a short put spread on, you want markets to move up. You want volatility to drop and you want time to tick by to see the benefits of time decay in premiums.

Check, check, and check!

The reality though is with HiPOS, you don’t need the markets to move higher to realize profits in the strategy.

Markets can move sideways or go lower. So long as they don’t move too far too fast in a trade the wrong way. Given where the market is in relation to the short put strike, you shouldn’t be too concerned if markets retrace a few percentage points back down from here.

We’ll leave it there for now but as always reach out with any questions and look for another update next week.