HiPOS Update: Churning and Positive Time Decay

By Derek Moore

New HiPOS Conservative Update

After Wednesday’s close, 11 trading days remain in this iteration of the HiPOS Conservative trade.

Looking at the chart of the S&P 500 Index (SPX), the market has been churning a little sideways and that means time decay is doing its thing and the open position currently has an unrealized profit. Of course, we won’t know what the trade “realizes” until expiration date. Or if there is an opportunistic early roll or other action.

But so far so good.

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 28st 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?

More of the same is just fine!

Keep running in place and let the time decay burn off. Or go higher, or lower, so long as it doesn’t move significantly lower towards either the pink risk curve or the short 5150 put strike. Speaking of that risk curve, notice how the distance between it and the SPX is growing wider as we march towards expiration day.

Volatility has been healthy over the course of the trade so one other thing you’d like to see is for a drop in those levels which would bring further relief to the price of the spread.

Remember we eventually want it to expire worthless at zero for a full profit.

We’ll keep this update short and sweat but as always reach out to a ZEGA team member for more information.

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