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HIPOS Weekly Update: The Power of Time Decay

By Derek Moore

The one thing we can count on for sure in the stock market is that tomorrow comes after today. That is the premise behind our HiPOS strategy; capitalizing on the natural time decay of options. It’s not always this obvious, but the current trade is showing exactly how HiPOS provides non-correlated returns from the regular passage of time.

Consider that while the market is off from the recent highs by 1.5%, our current HiPOS trade is just about flat since we entered the position. You can see on the chart above where we entered and the subsequent S&P 500 retracement. 

This demonstrates how the passing of time (time decay) is a benefit in two main ways. First, it gives us more room to maneuver above the purple defensive posture line. Second, as time ticks by, more and more time value is taken out of the premium of the option spreads. Since we sold them to open, we want them to eventually erode or melt down to nothing to realize a full profit. 

Speaking of time, as of the close Friday afternoon, there are 15 trading days left through expiration day on March 29th

This recent price action is a good reminder of why you and your clients use HiPOS which is to add a diversifying agent into a portfolio allocation. In this case even though the market is down since the trade was established, on an unrealized basis your clients are flat.

We’ll be back next week with another update but until then enjoy the weekend!