HiPOS Weekly Update: Like Watching Paint Dry?

By Derek Moore

I chose the seemingly derogatory title for this piece for a reason. Sometimes with this strategy, it is about time. Or in the case of short volatility strategies, time passing by so that more and more time premium comes out of the options positions.

Currently the market has moved higher from where we initially executed the trade. Since we are short a call spread, it means that the underlying S&P 500 Index is closer than before to the 3500 strike. The good news is that distance still represents about 8.7% away or out of the money from the closing price today.

Speaking of the market close today, accounts are currently showing a small un-realized loss on the open positions. Here we can see the effect of the market moving against us sooner rather than later in the life of the trade. Going forward, the strategy will benefit as the market moves along so that time decay ticks off. Now, do not stare at your screen as that would really be like watching paint dry.

Looking at the typical HiPOS graph above we can see that not only is the position still well below the short strike, but also still below our defensive posture purple line. The call side works a little different than the put side in that as markets run up towards our strike, volatility typically would abate or at least stay constant. When the reverse happens on the put side, typically volatility would increase which would not be constructive for the position.

Worth mentioning, also on the graph, is that the old all-time high in the S&P Index was around the 3390 level or about 5.3% higher from here. Some internal research points to post all-time highs the market only 50% of the time moves more than 3% higher after that.

For now, we have 12 trading days left to expiration. I recommend neither watching paint dry (if you were painting something) or staying too focused on the market charts. ZEGA’s traders are constantly monitoring things. This is a good example of just looking to move along the date curve.

We will be back next week with another update.