Where The Trade Stands After Today’s Pullback
As the markets march towards the close today, all the indexes have retraced after some green shoots the last two days.
For our primary HiPOS trade the news isn’t all bad though. Even with the pullback and the rise again in volatility, as less and less time remains until expiration, time decay is helping the positions. The trade sits right around breakeven give or take from where we entered.
After today there are only 7 trading days remaining until expiration on Friday May 27th.
Distance Out of the Money or OTM Still Around 13.5%
This is another benefit of higher volatility in that we can establish positions further away at the onset of the trade while still receiving the required target return.
You might remember this trade started near 20% OTM. We’ll get to the purple defensive posture line in a bit, but I wanted to highlight the distance you can see on the graph above. Notice the price level relative to the short 10300 NDX Index strike.
HiPOS trades are about probabilities and with the shrinkage of time that distance helps premiums erode.
What Are You Rooting For?
Getting right to the point, you want the NDX to trade sideways or move up.
Ideally, we don’t see a significant move downward that would close that OTM distance materially. Looking at the purple curve above, we want price to remain above that level. Remember, each day that passes towards expiration the line moves further down and to the right.
This allows more breathing room before our traders may take a more defensive posture on the positions.
Nasdaq 100 Index Volatility Index (VXN) YTD
Source: Yahoo Finance May 18th, 2022
Volatility Effect on Option Premiums
One note around volatility levels shown in the VXN chart above, which is the Nasdaq 100 Index equivalent to the VIX.
Thus far it has not surged beyond the prior highs made recently despite around a 5% drawdown today in the index. Remember, when we sell volatility, ideally it stays around the same level or retraces which helps reduce the remaining premium in your positions. When it is stable or falling, you see more of the positive time decay effect on current positions.
Unrealized gains or losses on positions are a combination of price, time, distance, and volatility.
Yes, interest rates as well, but for our purposes we’ll leave it there.
As always feel free to reach out to a member of the ZEGA Team should you have any questions around HiPOS or any of our other hedged equity approaches.