HiPOS Weekly Update: The Recovery Is In?

By Derek Moore

HiPOS Conservative Trade Update

With 9-day calendar days (7 trading days) to go until the August 23rd expiration, the S&P 500 Index (SPX) sits a full 16.5% above the short 4550 strike.

Volatility has come back down, and markets have moved higher since entry. You might remember in our initial post when the trade was established, this was exactly what you wanted. While there is still time left in the trade, we’d say so far so good, and this may wind up being  a nice recovery trade for the strategy after having to exit and roll early defensively the prior edition.

It’s worth noting that the market is also nicely above the ZEGA risk curve.

More on that below.

Reviewing the HiPOS Graph

Displayed are the vertical dotted orange line (expiration date), horizontal blue line (short put strike in the spread), the SPX price, and of course our ZEGA Risk Curve line.

This line represents a level should price fall below it, ZEGA’s traders may take a more defensive posture to further manage risk. We mentioned the SPX being comfortably above that curved area which is what you want. That curve runs down and to the right towards expiration date.

Early on in trades there is less room to breathe but as time decay kicks in and the days to expiration diminish, the probability of the market getting down to that level decline which is a positive.

In the current graph that curve looks more like a straight down line.

The reason is because implied volatility was so high when the position was entered, we were being rewarded with higher premiums on the credit spread sold. When volatility is lower you tend to see less of a stark downward slope.

If you are new to HiPOS just understand that by looking at the graph you can quickly judge where the trade is relative to the other factors.

What Are You Rooting For?

Given thus far you’ve gotten everything you wanted to this point in the trade, more of the same.

Because of the larger distance between the current SPX price and the short 4550 put strike, the market can go down as it has breathing room. Sure, if it keeps going up, or goes sideways, that will work as well.

What you are rooting against is a sharp reversal with a commensurate spike in implied volatility.

Time and distance are both on our side at this point.

To find out more about the benefits and risks of the HiPOS Options Strategy check out the presentation here: https://zegainvestments.com/products/hipos