HiPOS Weekly Update: Riding the Volatility

By Derek Moore

HiPOS Trade Update

The markets closed down Thursday after a gap down open this morning.

We are in the middle of earnings season where many companies have beaten estimates but talked about spending more on AI. That is a completely over simplified explanation and in the end the market hasn’t had a down day like this in a while. So, what does this mean for the current HiPOS trade? The S&P 500 Index (SPX) is still about 12.5% above the short put strike, which is a good amount.

That distance is what is known as the out-of-the-money (OTM) amount.

After today (Thursday), 16 trading days remain until the expiration on November 22nd.

You’ll notice that currently due to the higher volatility, the spread is retaining a lot of premium right now even though the distance is fairly healthy. What this means is the open positions are sitting at an unrealized loss.

That will fluctuate as volatility waxes and wanes, the underlying SPX Index moves, and the time to expiration winds its way along the calendar.

Reviewing the HiPOS Graph

Above is our normal graph which displays the SPX Index price chart, the vertical blue dotted line noting the expiration date, the dotted Papaya line illustrating the short put leg in our spread, and the ZEGA Risk curve in pink.

Despite the gap down today, the SPX is still above the curved pink line. This line is a guide and if the underlying price breaks below it, ZEGA’s traders make take a more defensive posture to further manage risk. It slopes down and to the right the closer we get to expiration date. This is representative of the positive time decay inherent in short volatility premium trades.

Price, time, and volatility are the drivers of the unrealized profit and loss position of a HiPOS trade which we eventually would like to expire at zero for a full profit.

What Are You Rooting For?

You’d like the markets to go up given we have a short put spread on.

Beyond that, a firming here or some sideways action would be helpful. More down movement is alright as well, so long as it doesn’t decide to sharply move lower too quickly in the cycle towards expiration. This trade is interesting because of how much volatility premium is being held in the spread price.

As we get through the guts of earnings season and past the election next Tuesday, you’d like to see volatility get sucked out of the market.

This would be helpful for the trade.

We’ll leave it there but do check out our HiPOS strategy section on our website where we have a short video, presentation, performance, and other information about the benefits and risks https://zegainvestments.com/products/hipos