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HiPOS Weekly Update: The Wheels are Spinning in Place

By Derek Moore

It has been 8 calendar days since we entered the most recent short call spread. To some of you, it might feel like the value of the position is running in place. Or spinning its wheels if you prefer that saying. But none the less, the value of the spread today is basically where it was at entry.

You neither have an unrealized gain or unrealized loss depending on how the market is fluctuating. This is a good example of the market direction moving against us a bit, yet the value has not changed due to the passage of time and the erosion of some volatility in the market.

At entry, the short call strike of our position in the S&P 500 Index sat about 8.5% out of the money.  Today it sits roughly 6% out of the money, meaning it has moved closer to our short call strike. We mentioned above how the drop in volatility has been helpful and the VIX Index chart below shows just that.

Source: Yahoo Finance

As sellers of volatility, the ideal situation is to sell premium when volatility is elevated in the short run and see it drop while the position is on. So, what now? At this point we have 15 calendar days left in the trade until expiration day on August 28th.  I will save you the time of looking at a calendar as that results in 11 trading session left.

You are rooting for the market to hang around or go down a bit from today's levels. If it stays here, that is ok too. Looking at our usual HiPOS conservative graph, we can see that the market sits below (this is what you want for the call side) the short strike as well as the purple defensive posture line. As time has ticked off, the curve moves higher and higher giving the position a greater margin of safety.

Of course if the market should experience a material surge lower with a volatility spike, there remains the possibility of entering a short put trade as well to form the Iron Condor. That opportunity does wane as the time to expiration nears closer, but it still does remain a possibility as of today.