HiPOS Weekly Update: Strategy Pressured but Stable as Market Suffers Consecutive Gap Downs

Where the Trade Stands

Despite the recent drops, our primary HiPOS conservative trade remains right around 10% out of the money.

This is the distance between the current S&P 500 Index (SPX) and the short 3400 put strike. The position has 10 days remaining until expiration. As you can see above, the sharp move lower has moved towards our purple curved line and has caused accounts to show unrealized losses.

Both the move lower and the increase in implied volatility has muted the benefit of time decay.

Are Gap Downs Typical in the S&P 500 Index?

While they do happen, the three consecutive gap downs of this size from close to next open are rare.

You’d have to go back to the COVID-19 March 2020 selloff to find a comparable period. While individual stocks do have more gaps, large broad diversified indexes tend not to stack these up in consecutive periods. Today’s up move was welcome as it steadied the progression in price.

Some extreme moves higher in bond yields has been a big driver in anticipation to today’s Fed announcement.

Reviewing Our Typical HiPOS Conservative Graph

As I mentioned earlier, price has come down towards the purple curve but remains above the line.

The purple line is the price where our traders may take a more conservative posture in managing risk. As we’ve pointed out in the past, each day that passes, the line moves down and to the right towards expiration giving it more room to breathe.

This is an example of how time decay is benefiting the trade.

What Are You Rooting For?

It goes without saying you want price to move higher to increase the distance between the SPX level and the purple line.

That also would expand the distance out of the money from where we sit now. You want volatility to subside as that will take some of the air out of option premiums. Then as always in a short volatility trade, you want time to tick by.

This will reduce the extrinsic premium and help to lower the probability that the SPX gets close to the short put strike.

We know that many new to HiPOS Conservative may not have experienced sharp drawdowns in markets.

ZEGA has managed through market drawdowns before and will continue to manage positions including any potential adjustments if needed. We’ll end this update here, but as always reach out to a ZEGA team member with any questions.