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HiPOS Weekly Update: Stress Testing the Strategy

By Derek Moore

HiPOS Conservative Trade Status

With only a week left until expiration on September 29th, the market’s recent turn lower is a great example of how the trade reacts.

Especially late in the lifecycle as there are only 5 trading days left and quite a bit of time decay has already been removed. We always say, later in the trade, there is more breathing room. Of course, the S&P 500 Index is still around 8% above the short 3975 put strike in our spread position. That distance is referred to as the distance out-of-the money.

Despite the latest swoon in markets, positions are still sitting with an unrealized profit.

Reviewing The HiPOS Graph

Above we can see the benefit of time decay where the purple curved line slopes down and to the right.

This is the line where if price moved below (in a short put spread position), ZEGA’s traders may take a more defensive posture. The reason that the line moves further and further away from the underlying index at entry is the time value inherent in options melts away each day that passes. The other reason is that the probability of a market getting to a level above or below the current price recedes when there isn’t as much time for it to make its move.

Put another way, the change of a market moving 8% in 5 days is less than the probability of a market moving 8% in a month or a year.

Probabilities are a function of price, time, interest rates, and volatility.

What You Are Rooting For

At this point you want next Friday to come and go and to realize a full profit as the contracts expire worthless.

Aside from that, the market can go sideways, up, or a little down so long as it doesn’t move too far too quickly in this last week. ZEGA has rules in place should that happen to manage risk. Ideally, you’ll see the value of the spread continue to move lower over the next 5 days.

Once a trade expires, a notation in your transactions will indicate contracts removed due to expiration.

We’ll leave it here but hope everyone enjoys the weekend. As always contact a member of the ZEGA team with any questions.