HiPOS Weekly Update: The Market’s Pain is Your Gain

By Derek Moore

HiPOS Conservative Trade Update

Today the Fed did nothing but said something the market didn’t like.

Long bond yields rose, and markets sold off a bit, which was good news for our HiPOS positions. While the short call spread was still an acceptable distance OTM(out-of-the-money) above the S&P 500 price level prior to today, the position was showing unrealized losses as the time value hadn’t come out of the trade yet. Premiums were also holding more value than normal due to the Fed meeting.

After today, you had the uncertainty of the Fed meeting come out of option prices while the decline in the S&P 500 Index increased the distance between the market and the short call leg of our spread.

The short put spread side of the position is far OTM, so the market move wasn’t a factor there.

Reviewing the HiPOS Graph

As you can see price has remained not only between the short call leg and the short put leg, but also between our purple curved lines.

The market had been inching higher and higher but as we normally point out, each day closer to expiration (Feb 9th) the time decay helps us more and more. This is why those lines move up and to the right and down and to the right as the trade progresses. For anyone new to HiPOS, the purple curves represent areas should the underlying instrument (SPX) move above or below, ZEGA’s traders may take additional steps to further manage risk.

Today the air came out of the ballon a bit in a good way.

What are You Rooting For?

Here price (SPX) and time matter.

You’d like the market to move lower but sideways over the next week works too. On time, you want the calendar to click forward so the remaining time value is squeezed out of the price of the spreads. Remember, as sellers of volatility we take in premium and then want the value of those positions to eventually move to zero to realize a full profit.

HiPOS traditionally has shown non-correlation to markets and interest rates and today was a good example of that.

We’ll, that’s it for now but if anything changes, we’ll post something here.