When our latest edition of our HiPOS conservative trade was entered the S&P 500 Index stood at 3020. Intraday Thursday we see the market hanging around the 2975 level in what I would call a bit of a meandering market. Despite some wider intra-day moves it now sits just 1.5% below the entry level and still above our short put strike by close to 11%.
Sideways markets will work for HiPOS as many long-time followers understand. Its just the sudden sharp outsized moves against our positions that may cause ZEGA’s traders to take a more defensive posture to reduce risk for clients. After trading ceases Thursday September 26th there will be 15 trading days remaining until expiration.
If we look at the graph above, we can see our normal defensive posture line (purple), vertical expiration dotted line, and the short put strike below the market. Its worth mentioning again how a trade early on has less room to maneuver as the index level and the purple line are closer together. After time value erodes as the days tick off, the line trends lower and to the right-hand side of the chart.
As we move forward in the lifecycle of this current position less volatility, time to decay, and the market staying above the short strike and the purple defensive posture line are all things to be rooting for. Speaking of the volatility environment, below we can see a chart of the one-year lookback of the VIX Index.
As we can see the current level is hovering around the 16 level with a recent tick up. Since we are short volatility in HiPOS, a contraction lower in volatility would help to lower the value of our spreads. This along with time decay, distance out of the money, and to a lesser extent interest rates all affect spread prices on the way to expiration day.