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HiPOS Weekly Update: Thus Far According to Plan

By Derek Moore

HiPOS Conservative Trade Update

Remember we always include the section on what you are rooting for?

Well thus far the market has done what you asked for. Since we are short deep out of the money (OTM) put spreads, the market moving to several all-time highs has been great for accounts in HiPOS. The further OTM distance between the current market and the short put leg 4425 the better.

After the close Tuesday the trade was just under 15% OTM.

Reviewing the HIPOS Graph

Above you’ll notice how wide the gap is between the market and the short put leg noted in the orange dotted line.

The market is also comfortably above the curved purple line. This is the area should markets fall below, ZEGA’s traders may take a more defensive posture to further manage risk. As time gets close to expiration on March 15, the line moves down and to the right. This reflects the positive erosion of time value and the lower probability of the market getting to the short put strike by expiration.

Not shown on the chart has been a reduction in implied volatility.

This is a measure of how pricey option premiums are.

When we sell volatility premium when it is higher and then we see a reduction of that level, it further helps to depress the value of the open spread positions. We sell volatility and look for it to expire worthless at zero on expiration to realize a full profit.

Price, time, and implied volatility are all major inputs to an options price.

What are You Rooting For?

At this point, you want time to tick by but you are good if price goes up, sideways, or down.

The nice thing about having close to a 15% OTM buffer is the market can go down and the trade can potentially still expire with a full profit. What you don’t want is markets to reverse sharply lower where they would get too close to the short 4425 put strike. More of the same is just fine.

There is still some time premium left in the value of the options that remains to erode off the price of the open positions but if markets don’t reverse sharply, we’d expect that to eventually melt away.

We’ll keep this update short and sweet but as always reach out with any questions.