HiPOS Weekly Update: Run in Place to Get to the Line

By Derek Moore

With expiration day just under 2 weeks away and counting, we wanted to give a short update on how the HiPOS Conservative strategy trade is holding up. You can see above on the chart that after entry the market has moved higher. Since we are short a call spread at the 4375 strike that is not necessarily the direction you were rooting for.

However, we can see that after the move higher the S&P 500 Index has settled into a range and has been running in place. This is fine and has allowed the purple curved line to move higher as it progresses to the right. This is a feature of the strategy as many long-time followers know. The more time ticks by, the more time value comes out of the premium in the spread. As of the close Monday the S&P 500 is sitting roughly 4.5% below that strike level as you can see on the graph.

With the remaining time and market level the remaining premium has eroded down to around 10 cents. You should expect that to move around a little bit higher depending on the S&P 500, but should not anticipate it would move much lower until we get to expiration day.

Recently an advisor using our strategy for their clients asked if we have different rules for short call spreads vs short put spreads. The quick answer is yes. But I suppose you want more than a one-word answer. While we do not share our rules for entry or exit, there are some attributes to what happens when trades get threatened by moves in the underlying.

For short call spreads it would be a sharp move higher towards our call strike. The reverse for put spreads where a sharp move lower, especially early in the position’s life, would cause the premium to move higher. Since we sell premium, the goal is for it to eventually expire worthless at zero.

We generally are more comfortable being a little closer on the call side since in most cases you would not see a big increase in volatility that would be detrimental in rolling or closing the trade out. When markets correct lower, we normally see an increase in volatility causing premiums to swell.  So, this is just one aspect that goes into our calculus when entering or exiting trades.

We will be back again in the next few weeks with an update. As always, reach out to ZEGA with any questions on this or other strategies.