HIPOS Weekly Update: A Brief Volatility Window for Entry

by | Jan 11, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), Option Trading, S&P 500/SPX

After a brief end of year pullback in the S&P 500 the index has resumed its rally starting 2017. As we’ve been writing about, typically we need a volatility spike to enter a new position that meets all our criteria. That window opened for a brief time in the New Year which allowed us to establish our primary HIPOS position. Since entry, the market has moved higher and volatility has dropped. This is a positive for your clients currently in the trade. And we are now a week into our trade and thus a week closer to expiration day. This is helpful since as the graph above displays, the position has maintained its distance between the S&P 500’s current price and the defensive exit curve but we have less time until expiration. At midmorning in Monday’s session, the index is roughly 16% away from our short strike price.

I mentioned in the title that we were able to take advantage of a very small window to enter this latest position. One of the benefits of using ZEGA to manage a volatility premium selling strategy is our ability to always be monitoring the market. Our trading experience allows us to institutionally work orders and pounce when our conditions for entry are met. If we were trying to put on a new positon today, for instance, given the current market conditions, it would not be available. Advisors bringing on new clients need not worry though. Our traders continue to monitor the market looking for new entries for new money as it comes into the strategy.

Going forward you and your clients will want the market to remain safely above our potential exit curve and for time to march forward as each day provided the benefit of time decay in the value of our spreads. Since we sell premium, eventually we want those values to go to zero.