HiPOS Weekly Update: Sideways Action a Positive
Observations on HiPOS Conservative Trade
In our primary HiPOS Conservative trade, currently it has reaped the benefits of some sideways action in the underlying S&P 500 Index.
Price combined with time passing and the reduction in volatility has produced unrealized profits thus far. The position still has more premium remaining that ideally goes to zero to realize a full profit at expiration. While we’ll get to the chart in a bit, you can see how price has traded within a small range since entry.
It’s a good example of how HiPOS Conservative can potentially produce returns without the need for markets to appreciate materially higher.
How Volatility Dropping Helps Current Trade
Seasoned options traders understand that volatility has a huge effect on option premiums.
When volatility is high, the options market is estimating the probability of larger moves. If expectations of large moves increase, volatility increases which leads to option premiums expanding. When volatility drops, option premiums shrink as the likelihood of wider moves in markets are less probable. In a perfect world we would always put on new trades with high volatility and then see it shrink.
In practice our traders, due to our stringent rules and patience, often establish new trades after a short-term spike in volatility
Currently volatility is lower than when we entered so this option pricing input has been a tailwind thus far in reducing premiums and the probability of the S&P 500 Index reaching our short put strike.
Reviewing our HiPOS Graph Above
Above you can so how as the days have passed; the purple defensive posture curve has moved down and to the right.
This reflects the positive time decay element present in short volatility trades. The S&P 500 has more room to breathe before it would touch or move below the purple curve. As a reminder, this is the area where ZEGA’s trading team may elect to take a more defensive posture in risk management.
After today, this trade still has 14 full trading days left until expiration.
So far almost everything you would be rooting for has been delivered.
That’s it for now, but we’ll be back on here next week with another update