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HiPOS Weekly Update: What Recession?

By Derek Moore

Just a few weeks ago it seemed like we heard daily reports of the impending recession. Yields had dropped to lows not seen in a few years and pundits on the financial channels got defensive in their security allocations. Fast forward just 20 days and today the market is on pace to reach a new fresh all-time high. Bond yields are moving higher as a sign of risk on. And volatility is dropping back down.

So, what has changed? Or does it matter for the HiPOS strategy? The quick answer is not too much as the strategy works well in up, sideways, or down markets provided the move doesn’t happen to fast and too severe against the short spread.

Yet this surge higher after only a brief respite lower in the markets means that we have seen the value of the short put spread decrease. This is positive for the strategy, as eventually to realize a full profit we need the value of the position to be worthless. Worthless yes, but a full profit for us as net sellers of options premium.

With this latest move higher, the underlying S&P 500 Index is now around 12.7% above our short put strike thus increasing the distance out of the money. This along with the drop in implied volatility has helped the pricing of our spread trade.

This move also is helpful in keeping the market above our purple curved line. You can see above that the line continues to drop lower, thus giving us more room to breathe, the further the position gets to expiration. Speaking of expiration, due to the weekends and Thanksgiving holiday, we now only have 14 ½ trading days until expiration on November 29th. The half day is due to the market only being open 4 hours on the Friday after Thanksgiving.

Moving forward you will want the market to remain around where it is today or higher as time value ticks away with each passing day. We mentioned that the current HiPOS trade is of the longer time to expiration variety in order to preserve the opportunity to slide in a short call spread to pair with our existing short put spread. ZEGA’s traders continue to monitor the premiums and market levels to see if a call side trade would qualify under our strict rules.

If anything develops, we will off course be back on the blog with an update. Until next week enjoy the slate of college football games this weekend that should shape the playoff race.