By Derek Moore
Where the Current HiPOS Conservative Trade Stands
We always say that HiPOS does ok even if markets move against us.
So long as markets don’t move too much too early in the lifecycle of a trade. With 16 trading days left until expiration day on August 31st, the short put spread value is only a tiny bit above where we sold it at entry. What this means is accounts are marketing at a small unrealized loss. Despite the headwind of a market moving lower and an increase in implied volatility, time decay is our friend.
As premium sellers, each day that passes sees some erosion in the time value of the short spread position.
This is one of the primary benefits of a strategy like HiPOS.
Update On the HiPOS Graph
Above we can see the chart of the underlying S&P 500 Index, the purple curved line, short strike dotted line illustrating the short leg 2975, and the vertical dotted blue expiration line.
A few things to point out this week. First, as time moves forward the purple risk curve moves down and to the right. Think of this as an area should price move below, ZEGA’s traders may take a more defensive posture. The more time clicks by, the more room to breathe the positions have.
While the market is below where we entered the current HiPOS position at, the market is still about 11% above the short 3975 put in our spread.
This is how much the position is considered out-of-the-money.
What Are You Rooting For?
First ideally the market decides to hang around here for a bit without moving materially lower.
If it does drop further, that is fine, but you just don’t want markets to make outsized moves lower that would push prices uncomfortably close to the short strike. As I mentioned above, ZEGA’s traders can take defensive action to adjust positions if that happens.
The other aspect of this trade is time.
The smaller number of days remaining until August 31st, the better as time decay will do its thing for us.
Finally, you’d like volatility to not spike significantly. This would cause the value of the spread to increase where we want it to eventually expire worthless at zero. While the VIX Index has risen to just under 16, compared to where we were all of 2022, it is still relatively low.
So that’s it for this week’s update. Many of you newer to HiPOS probably got used to markets always moving up after entering a new trade so this is a good reminder of how the strategy reacts when we get a market that moves against the direction you are rooting for.
So far so good and off course we’ll continue our updates as we progress towards expiration day.