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HiPOS Weekly Update: Will Bulls or Bears Win the Debate?

By Derek Moore

HiPOS Conservative Weekly Update

As of today (Friday) around 11 a.m. eastern time, the markets are higher on the day while easing off the fresh new all-time high hit earlier this morning.

Since we are short an out-of-the-money (OTM) call credit spread, markets were moving closer to the short 5850 strike level. Despite the markets moving higher, it is still about 6.4% OTM and nicely below our risk curve. There are only 14 trading days left until expiration after today’s close.

Because of the time decay already and where the short strike is in relation to the market, accounts holding HiPOS Conservative are showing an unrealized profit.

Price and time are important factors in whether a particular trade is profitable.

Reviewing the HiPOS Graph

Above we can see the price of the underlying S&P 500 Index (SPX) in relation to the short 5850 call strike in the spread noted in the blue horizontal dotted line.

Our risk curve represents areas where should price rise above it, ZEGA’s traders may take a more defensive posture to further manage risk. We noted above that thus far the price is comfortably below that line, which is a positive. Off course these are point in time observations and markets can move.

For HiPOS, looking at both the distance below the line and below the short strike is helpful.

What You Are Rooting For

While not many people want markets to go down (assuming you aren’t short), from a directional point of view that is what you want.

Sideways, and even up is fine so long as it doesn’t too much higher too fast. That’s one of the potential benefits of HiPOS, investors potentially can realize profits in up, down, or sideways markets within limits. You also want the calendar to continue to tick by. This lowers the probabilities a market can reach the short strike which we you don’t want.

The call side of a HiPOS trade works a little different than the put side when it comes to volatility.

The reason being that typically when a put side is hurting you (moving lower fast), volatility tends to spike which can cause premiums to rise.

You want volatility to go lower or remain constant which helps the price of the spread. Remember as sellers of volatility premium, you want the premium to eventually erode to zero to realize a full profit. On the call side, if markets were to move up, you wouldn’t expect volatility to surge higher. The volatility component just works a little differently.

This is something beyond the scope of this article, but worth mentioning.

We’ll leave it there but as always, reach out to a member of the ZEGA team with any questions and for more information you can check out the strategy presentation here: https://zegafinancial.com/products/hipos