HiPOS Weekly Update: Testing but Not Breaking Down

State of The Trade

The Nasdaq 100 Index or (NDX) has dropped just under 6% since our primary HiPOS Conservative trade was put on.

The good news is despite the drop, the distance between the NDX and the short 11125 put strike is still above 14%. Due to an increase in volatility and the market moving down you and your clients will see positions with unrealized losses in account. It’s a good example of the tension between distance, volatility, and time.

Speaking of time, after the close today, only 8 trading days remain until expiration.

Reviewing Our HiPOS Graph Above

Above you can see the NDX as it has drawn down lower but still above our purple defensive posture line.

That line, where ZEGA’s traders may take a more defensive stance to further manage risk, slopes down and to the right the closer we get to expiration day. Each day that passes, the positions have more room to breathe as the positive effects of time decay come into the short option spreads. Down moves like this are better to have happen later in the trade versus early after putting the trade on.

Part of the design of the HiPOS Conservative strategy is to be able to withstand and potentially prosper in up, down, and sideways markets.

That is, of course, provided markets don’t move too far and too fast towards our short strikes.

What Are You Rooting For?

While the obvious answer is to see the NDX move back higher, volatility dropping and time ticking by will be important factors on the unrealized values of your positions.

The VIX Index, which measures volatility, jumped up after the trade was entered from an already elevated level. The down moves in markets coupled with some key NDX companies reporting earnings have a little more embedded premium right now. Companies like Microsoft, Google, and Apple to name a few.

The closer we move towards expiration day, the less probable a market gets to our short strike price level.

So, we’ll leave it there for now but of course we’ll be back with more updates should they be warranted.