HiPOS Weekly Update: Battling the Markets but Holding

By Derek Moore

HiPOS Conservative Update

As of the close Tuesday afternoon, the S&P 500 Index (SPX) was about 7.6% above the short 5150 strike in our short put spread expiring March 21st.

This is the distance out-of-the-money (OTM). Currently, the positions are showing an unrealized loss due to the movement of the SPX lower and the surge in implied volatility. After Tuesday’s action there remained 8 trading days left until expiration.

We’ll get into the details but know that we’ve been through moves like this before over the decade plus we’ve been running the strategy.

HiPOS gets tested every so often and is to be expected. This is why you’ve already managed your risk by keeping your exposure to HiPOS Conservative at no more than 10%-20% of a portfolio depending on your risk level and financial plan with your advisor.

You should feel confident that the trading team at ZEGA is monitoring it and constantly making contingency plans IF we must adjust.

Reviewing the HiPOS Graph

Above we have our normal 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 March 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 reason you see that shift is that as time passes, the probability changes as to the likelihood of the SPX closing below the short 5150 strike.

The less time and the further away the current market is from the short strike leg, the lower the probability.

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. You might have noticed that Tuesday’s candlestick bar drifted down slightly below that risk curve. Going below that line doesn’t automatically trigger action but internally we are reviewing how to manage risk for you and your clients as we manage the positions.

While we don’t disclose publicly our internal rules for trade management to protect our clients using the strategy, I’ll share that when the SPX (or other underlying) moves below that line, it means there is more sensitivity to corresponding changes in the underlying.

I promised no math so for now let’s move on to what you want.

What Are You Rooting For

Move higher to give the position more cushion and time to tick by.

Pretty straight forward this week. We’d like prices to firm up here for a bit or turn higher for a period between now and expiration.

The other aspect you want is a drop in volatility which has risen as you can see below in the updated graph.

Source: Bloomberg

While this most recent close on the VIX Index of 26.92 isn’t nearly as high as December’s or August's, it is elevated, which means the value of the spread is higher due to the volatility component inherent in option pricing.

You want that to drop.

Then you want time to move forward.

I mentioned that there are only 8 trading days left after Tuesday until March 21st expiration. Time decay is an asset when selling premium and the less the better is the general rule with OTM options.

If anything changes, we’ll post an update but if not, we’ll plan on our regular weekly update next week.

Again, we’ve been through this before and we’ll manage through it.

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

I’ll also point out two resources to help you gain perspective from our experience in markets on the current environment.

Jay and I recorded a podcast that you can access here https://open.spotify.com/episode/6bZK42VgQRXRwkR4qHLgtl?si=S9c6bCsFSOWX7e_i__PWdQ

We also posted a recent article talking about corrections you can check out here https://zegainvestments.com/blog/for-investors-worried-about-market-corrections-this-is-why-you-hedge-so-that-you-can-worry-less