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HiPOS Weekly Update: Mostly Up with a Little Down

By Derek Moore

As the second week of our latest HiPOS conservative trade ends, the market action has generally been bullish with a sprinkle of bear moves mixed in. One of the ways we monitor our HiPOS trades is by calculating the current distance from the S&P 500 Index (the underlying) to the short put strike.

On Friday the S&P 500 Index opened around 3353 which means it sits about 14.2% away from the short strike line. In other words, it remains a good amount out of the money to put in options language. It also has held up at a level higher than when we initially put on the position.

Once Friday’s close occurs, there will only be 10 trading days remaining until the expiration March 6th. This has not only resulted in less time value, but also as we can see above on the graph, more room above our purple defensive posture line. The line continues to curve lower and to the left.

While the market action and time decay have been positives, one area we haven’t seen as much relief from comes from the sustained higher (albeit below historical averages) VIX volatility levels. Looking at the chart below, we placed this trade on February 7th but today the volatility index is almost the same level.

Source: Yahoo Finance

Since we are short volatility, when volatility moves lower it reduces the value of our spreads (positive). When it stays constant (or higher), we don’t see a benefit from this individual component of options pricing.

As the next two weeks unfold there a couple of things you and your clients will be rooting for. First, the market remains where it is, goes higher, or at least doesn’t move lower too far and too fast. Next, you simply want to keep turning the page on the calendar allowing more time premium to come off. Finally, a collapse in volatility would also reduce the premium left in the trade. As a reminder, the strategy’s goal is for the premiums on the spreads to go to zero in order to realize a full profit.