HiPOS Weekly Update: Withstanding the Market Volatility

Current Lay of the Land in HiPOS 

After last week’s volatility surge and market drop, wanted to check in around our current HiPOS Conservative trade.

Straight over to the graph we go as you can see that the S&P 500 index caught its breath and has since stabilized. All the while we still have high levels of implied volatility in markets. You should also note that the price level never pierced the purple curved defensive posture line. As each day goes by, that line continues down and to the right providing more room.

We always note that markets moving below that line may see ZEGA’s traders turn more defensive in the management of the trade.

How Have Market Dynamics Effected Positions

While last Thursday’s steep opening decline and jump in volatility cause positions to veer into unrealized loss territory, the markets subsequent rally off the lows and stronger move Friday helped assuage spread prices. 

Monday saw markets close near the highs of the day. Volatility remains on the higher end of the scale which causes the premiums to remain elevated. This mutes the positive effect of time decay you would expect to erode spread values. Said another way, the market is pricing in expectations of larger moves up or down in the interim.

The close Monday in the S&P 500 was higher than where it was when the short put spreads were sold originally.

What are You Rooting For? 

There are 14 trading days left until expiration.

Obviously, you’d like the market to move higher from here. Although if it rests for a bit at these levels, that works just as well. Down from here is also acceptable so long as it’s not too far too fast. We mentioned the purple curve before and will note again the further we get along towards expiration, the more room to the downside the trade has.

Ideally you want implied volatility levels to drop which will positively affect how much volatility premium is embedded in the price of the put spread.

As a reminder, this trade is currently sitting a little more than 22% out of the money.

You can see that distance from the close of the S&P 500 Index of 4373.94 down to the short strike at 3400. Because of higher volatility even before the Russia news, we were able to start the trade far out of the money already. With more time behind us, time decay is our ally.

With that we’ll wrap up for now. As always, reach out to a member of the ZEGA team with any questions.