HiPOS Weekly Update: Time Decay Doing It’s Thing

By Derek Moore

HiPOS Conservative Trade Update

Looking at the underlying S&P 500 Index (SPX) early afternoon Friday July 5th, once again  a new all-time high was hit.

Since we are currently short a call spread above the market, this would seem to be bad news for the trade. The SPX, however, remains just under 5% below the short 5850 strike price. This is the distance out-of-the-money (OTM). After today’s market close, only 10 trading days remain until the July 19th expiration.

As the calendar has clicked by, the probability of the market getting to the short strike begins to lesson and the time value inherent in the short spread has waned as the trade has aged.

This is another example of how the HiPOS Conservative strategy can potentially realize profits even when markets move against the position.

Reviewing the HiPOS Graph

Above we see the new high in the SPX today.

While markets have moved higher against the short 5850 call strike shown as the blue horizontal line, price has remained below the ZEGA Risk Curve. This is the line where if price were to move above it, ZEGA’s traders may adopt a more defensive posture to further manage risk.

The distance OTM can be seen comparing the SPX price to the short call spread.

What Are You Rooting For?

You don’t want the market to start charging higher too much and too fast.

Not that there isn’t more room to run, but ideally you want markets to go a little sideways or down to open the distance of the OTM percentage up more. You want time to tick by as it helps keep the value of the spreads lower while increasing the probability of success. It’s a little different rooting against the market going higher when we are on the short call spread side, but on this update, we only focus on the HiPOS strategy.

Of course, those of you in our other strategies like Buy and Hedge are enjoying the market moving higher.

The next HiPOS trade may very well be back on the put side depending on how the calculations wind up.

Well, let’s call it there but as always reach out to a member of the ZEGA team for more information or go to https://zegafinancial.com/products/hipos to learn more about the strategy including the benefits and risks.