HiPOS Weekly Update: Positive Expiration Never in Doubt?

By Derek Moore

With Friday’s expiration of our current HiPOS conservative trade, it is on track for another realized profit. As of the close Thursday, the Nasdaq 100 Index (NDX) was resting 17.2% out of the money from the 11200 short put strike.

Someone asked this week if the trade was ever in doubt? Anytime a short volatility spread is placed, you have risk in this strategy. We deal with probabilities not certainties. We manage through trades accounting for risk.

 If we look at the graph above you can see that early in in the trade, the NDX dipped towards our curved purple line. Early on, all HiPOS trades have more risk of going negative since there is not as much room for the underlying price to move around. So, while we cannot say a trade was never in doubt, the probabilities of it being successful increased the further along the curve the trade went.

As time moves on, you can see the curve moves down and to the right, the market can oscillate much more without stressing the positions. Later as markets firmed up and turned higher, the probability of the trade moving against us in a material way reduced.

In the past we have written about how both a reduction in implied volatility and time decay help HiPOS trades.  Another question I got during the week was whether the VIX Index going lower reduced opportunities in finding our next trade?

Source: Yahoo Finance

For some perspective refer to the graph above showing a 5-year daily chart of the VIX. While an 18.04 VIX level may seem low, looking back to 2017 where multiple times the volatility index dipped below 10, relatively speaking no.

When volatility is lower you should expect more time in between the expiration of one trade and the placement of a new one. You also might expect the new trade to have expirations to be more of the 4-week variety as opposed to some shorter durations we were seeing in 2020.

There are various calculations that we follow for a new HiPOS position to be established. Once we do identify a new position, which can be either a short call or short put spread, we will be back to update everyone. Volatility is still robust, and you might remember we found numerous trades over the calendar year of 2017 even though the VIX was at record lows.

Enjoy the weekend!