HiPOS Weekly Update: Positive Time Decay Mutes Negative Market Moves

By Derek Moore

HiPOS Conservative Trade Update

With only 8 trading days left until expiration, the primary HiPOS trade is sitting with an unrealized profit despite the market being down from where it was on entry.

This is how time decay of options premium works when you sell volatility. The less time to expiration, the more the value of the extrinsic OTM premium (out-of-the-money) is reduced. The reason is the probability of an underlying market reaching the 3700 strike continues to drop with each day especially given positions are still 11.5% below the market.

These are all positives with this trade iteration.

Reviewing the Graph

Speaking of time decay, you can visualize that effect by looking at the purple curved line above on the graph.

It slopes down and to the right the more you advance towards the November 10th expiration date. That 11.5% OTM distance can be seen by looking at how far above the market is from the 3700 short leg of the put spread. You want more distance and less time.

We noted at the onset that this trade was shorter in duration than the long-term average for HiPOS.

Volatility was higher, which allowed a position shorter in length but still taking in the requisite premium (and distance OTM) required as part of our extensive rules for entry.

What Are You Rooting For?

No tricks (hey it is Halloween!) and more of the same where the market meanders, goes up, or goes down provided it’s not too drastic of a move.

You want time to tick buy and get to expiration day, but with volatility remaining on the high side once this trade expires. Following on the shorter duration of this position, if volatility stays higher, we can potentially get two more trades in before the end of the year. We’ve still got 8 trading days to go so maybe a little too early for that discussion, but hey, this is the what are you rooting for section.

For now, we’ll leave it there but will be back next week with an expiration update.