By Derek Moore
Where HiPOS Conservative Stands
Given how much markets have been up, any down days feel almost surprising.
To put it into perspective, we are only down about 2.5% off the most recent 52-week high. With that retracement and some increase in volatility, you and your clients might notice HiPOS flipped to an unrealized small loss. The positions will move around, especially earlier in a trade.
The good news is that each day that passes, the more time value erosion works for us.
Plus, the market is still about 11.2% above the short 3975 strike price which is the percent out-of-the-money (OTM).
Reviewing the Graph
Above we can see the markets’ retracement from highs.
We can also see how the underlying S&P 500 Index price gathered closer to the purple curved line. This is an area where if price recedes below it, ZEGA’s traders make take a more defensive posture. Expiration day of August 31st is represented by the vertical dotted line.
Rather than make you check the calendar to see how many trading days are left, we have 19 until expiration.
Looking again at the graph, as time passes, the purple line moves down and to the right.
This reflects not only the reduction in time premium, but the recalculation of the probability of expiring worthless (what we want) as the calendar moves forward.
While price has dropped a bit, thus far HiPOS is up to the test as there is more and more room for the market to breathe as we continue forward.
What Are You Rooting For?
Of course, having an open short put spread, you want the market to move higher.
But, sideways and even lower is still fine. The key is you just don’t want to see the market move too sharply lower too soon. One of the benefits of HiPOS is that you don’t need markets to go only in one direction to potentially realize full profits on trades.
We mentioned the 19 trading days left.
You also want to see time pass by as the lower the days to expiration is, the more time decay kicks in.
So, we’ll keep it short and sweet this week. As always reach out to a member of the ZEGA team with any questions.