HiPOS Weekly Update: Out of the Money Percent Still Matters

As we move closer towards the August 13th expiration date, I wanted to provide an update on our primary HiPOS Conservative position. Thus far we are sitting with an unrealized gain as the underlying S&P 500 Index has cooperated with a continuation of its uptrend after a short-lived selloff.

As the title indicates, the distance out of the money (short put strike = 3550) is how the spread positions are priced. Remember, we want the value to eventually go to zero. The further away and the less time to expiration, the lower the remaining value of the spread position.

As of the close today, we are about 19% out of the money. Put another way, the current S&P 500 Index is around 4390 so you get the picture as to how far the index would have to fall to hit the short strike. I briefly mentioned time value and it is worth pointing out that there are still 17 calendar days remaining in the trade.

This means that there is still a bit of time left until the remaining time value really starts to get removed from the value. Although the majority of this position’s positive move in the spread value has come from the index moving further out of the money, the time value between now and expiration day is a large part of the value at this point.

If we look at the graph we can see all of this visually represented by the distance between the current market and the short strike. But also, see how the purple defensive posture curve continues to move further down and to the right meaning the index can have more freedom to move before ZEGA’s traders may need to potentially make any adjustments to positions.

So, what are you rooting for? Just have the SPX keep doing what it is doing and get to expiration day. No more no less. And if we do get a selloff, that is alright as well since the aforementioned OTM (out of the money) distance remains a robust 19%.

We’ll be back next week with another HiPOS update. Until then remember to reach out to the ZEGA team if you have questions or are interested in adding any of our strategies to your advisory offering.