HiPOS Trade Update: Taking What Volatility Gives Us

By Derek Moore

New HiPOS Conservative Trade (Roll)

Monday the ZEGA team opportunistically closed out the existing HiPOS trade which had made almost all its profit and rolled into a new position that expires February 21st.

The market pulled back, and volatility shot up which are prime conditions for a HiPOS entry. The new vintage was around 14% out-of-the-money (OTM) with 18 trading days until expiration. We know we often state that we hold trades to expiration and look for them to expire worthless. But we also say if there is something to roll to early that benefits your clients we’ll take that.

Monday’s conditions set up nicely given we only had mere days left to expiration in the former trade, and the new trade was ripe for the taking.

Reviewing the HiPOS Graph

Above we have our typical illustration showing the chart of the S&P 500 Index, the horizonal dotted papaya line showing the short 5150 put level, the blue dotted vertical line representing the February 21st expiration day, and the pink ZEGA Risk Curve.

The distance on that graph from the current SPX price to the short spread leg of 5150 represents the OTM amount. The risk curve represents areas between now and expiration where if the SPX should fall below it, we may take a more defensive posture to further manage risk. We normally point out that the reason that line curves down and to the right is due to the positive time decay inherent in short volatility trades.

The probability of a current market getting to the 5150 level is determined by the current implied volatility, time to expiration, and the distance OTM.

As the days tick by, so long as markets don’t threaten the short put level, we’d expect that probability to decline.

What Are You Rooting For?

Ideally implied volatility to hold here or go lower coupled with a firming of markets or a turn back higher.

The good thing about HiPOS is historically it has offered a lower correlation to equity markets in that the SPX can go down, and you potentially can still realize a profit. What you don’t want is the market to move lower early in the trade and too sharply lower towards that 5200 level.

While normally you don’t want time to go by too quickly, in the case of HiPOS you welcome it as each day that passes means more time value erodes on the short spread.

We’ll have more updates as the trade moves along but for now that’s the big New Year update.

You can check out our website https://zegainvestments.com/products/hipos to learn more about HiPOS, its risks, and benefits for yourself.