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HiPOS Weekly Update: Relaxing Weekend of Time Decay

By Derek Moore

With the long 3-day Memorial Day holiday, the markets are closed on Monday. This means we are 3 days closer to expiration come Tuesday morning. I have had advisors ask how much time decay erodes over a weekend like this? To fully answer this, I would need quite a bit of space and would get into technical aspects that would put most people to sleep.

So rather than do that, the quick answer is while time decay is accounted for, you won’t see a massive drop from Friday’s close to Tuesday’s open.  For the most part this is already priced in based on actual trading days to expiration. However, on Tuesday, it will reflect that there are only 4 remaining trading days to expiration.

A better way to look at this is each day you are in a short volatility trade; you have risk on. Every day the markets are open, you have risk of some black swan multi sigma event putting pressure on your positions. As the title says, market holidays and weekends are relaxing days in the strategy.

The good news is that you ideally let ZEGA monitor the positions, so you do not have to. Currently, with the passage of time and price rebounding on the underlying Nasdaq 100 Index (NDX), the current HiPOS positions sit 15% above the short put strike. That is good!

More good news is that after the close Friday, only 4 trading days remain. You can see the progression on the HiPOS graph above. Also notice how price has moved higher and at the same time, the purple defensive posture line moved lower and to the right with the passage of time.

I wrote about that in our first update when price was hugging the line as it retraced. So, what now? I would not expect too much change in the value of the spread so long as the NDX does not make a sudden sharp move to the downside. I would also say we are pretty sure adding a short call spread to form an iron condor is off the table given the short time to expiration.

So, with that, enjoy the holiday weekend and we will be back next week with another update.