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HiPOS Weekly Update: Price and Time Are Competing Close to Expiration Day

Increased Volatility and Price Pressure Positions

The volatile price movements over the past two days that followed last week’s 4 days of closing at the lows has put some pressure on our primary HiPOS conservative trade.

At the low point yesterday before the massive reversal the S&P 500 Index, while never below the short strike, got to within 4.5%. Volatility also shot higher which made option premiums more expensive. The combination of these two have negatively impacted positions despite increasing time decay.

After today’s close there are only 3 remaining trading sessions until expiration Friday afternoon.

The short time left in the trade is a positive as any combination of lower volatility, and price moving higher, will augment the increasing erosion towards expiration.

Potential Defensive Action Before Expiration

Looking at our HiPOS graph above you can see how price came down to hover at the defensive posture purple curved line.

We always point out that the trade coming under pressure closer to expiration is better than early when it doesn’t have as much room to breathe. ZEGA’s traders continue to monitor the position and if needed, will incorporate any number of tactics to further manage risk. Some of you might have seen us simultaneously roll the trades out to a further expiration in the past.

One of the advantages of this trade is that the expiration is in the afternoon as opposed to Friday morning after the opening rotation. This allows us more time to decide on any action.

The Fed Meeting and Volatility

Tomorrow the Federal Reserve will conclude their meeting.

This means Chairman Jerome Powell will hold a press conference to answer questions on their policy decision and the future of rate hikes or balance sheet reduction. Ahead of the meeting we are seeing an embedded volatility premium still in option prices given the perception of higher potential for moves post meeting.

This is an example of how volatility, much like earnings, can come be higher into events but then see reductions after the news is out.

What Are You Rooting For?

Like always time to tick by but really you want price to stabilize and move a bit higher along with volatility coming out of the market.

Normally I comment that the market can go down, sideways, or up. But with the recent pullbacks, more breathing room would be a welcome result. You’d also like to see the variance between the highs and lows to normalize which would reduce the implied volatility in markets.

As of the close Tuesday afternoon, the S&P 500 Index is again off the lows of the day, currently sitting about 7.5% above the short 4050 strike price.

As the next few days unfold, the ZEGA trading team will be monitoring prices and if need be, take defensive action. If we do wind up making any adjustments, we’ll be sure to post another article to update everyone.