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HiPOS Weekly Update: More of What You Want Today

By Derek Moore

Where the Current HiPOS Conservative Trade Stands

With only 10 trading days to go until May 19th expiration, this week was a measure in extremes.

One day the market sells off on fill in the blank worry. Next day after Apple didn’t disappoint the S&P 500 Index (SPX) rallies at the open. In the end looking at the chart above, its more sideways action and that has worked out well thus far.

The SPX is sitting around 15% above the 3500 short put strike in the spread.

That is the amount out of the money and still a nice distance between the two.

The other thing to point out is as time has passed, the SPX continues to rest above the purple defensive posture curved line also shown above in the chart. This is the area where if price were to drop below, ZEGA’s traders may take a more defensive posture to further manage risk. As time goes by it drops down and to the left, reflecting time decay and probabilities of expiring below the short strike erode.

Volatility (i.e., the VIX Index) is below where it was when we entered the position.

This helps to reduce the value of the premium contained in our short spread.

Why HiPOS Can Offer Diversification from Long Equity Portfolios 

In general, since most people are long the market in some way or another, you want markets to go higher.

HiPOS doesn’t necessarily require the market to go higher to realize a full profit. As you’ve seen thus far, markets have been a little wider of late but generally sideways. For HiPOS, this just lets time decay melt the premium over time through expiration. You also saw that even when markets moved lower post trade, the out of the money distance of SPX was wide enough not to cause too much concern.

This is why HiPOS Conservative potentially may make sense for portfolios as a diversifying satellite allocation.

What Are You Rooting For? 

Nice weather, health, and happiness?

Oh yeah, of course that stuff! With HiPOS you want more of the same. Just keep ticking off days on the calendar to let time decay work. As sellers of option premium, we want it to erode over time and eventually to zero on expiration day. Ideally, the S&P 500 Index just keeps trending sideways or higher.

It can go lower, so long as it doesn’t reduce the gap in the distance out of the money too much.

We’ll leave it there for now but will plan on another update next week.