HIPOS Weekly Update: A Pot of Gold at the End of The Rainbow?

by | Mar 14, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), Option Trading, Volatility

Friday is St. Patrick’s Day. It also happens to be expiration day for our primary HIPOS trade. Yesterday, the Russell 2000 Index was up mildly which meant it continues to sit in the middle of our two short spreads. Otherwise known as a short iron-condor position.

Your clients should want the index to remain safely in between both short spread strikes as it marches towards expiration day. The value of the positions shouldn’t change too much over the next few days provided no drastic moves happen in the markets.

Two questions from advisors came up since the last time we checked in. First, if most of the profit has been realized why not roll and try and generate more premium? The other: will we see more of these iron-condors?

On the first question, our traders are always monitoring the market for opportunities to roll the trade – but only when the roll meets our criteria. We sell spreads and take in premium. Then the spreads either expire worthless for a full profit or can be bought back to close them. Even though we only have a few days left until expiration, there is still some extrinsic time premium left. Closing early would reduce the total available profit. Generally, we would roll if there was a strong trade to go in to and our cost to buy back the spreads was not too expensive. At this point with the trade so close to expiration, the expiration for your clients is what is most beneficial for your clients.

On the Iron-Condor point? We have not been able to sell a call spread that met our criteria for several years now. Our traders always review both the call and put side, but call spreads just have not satisfied our rigorous rules for entry most of the time. Some of that relates to the low volatility market we’ve been in. Some is the result of record low interest rates. Interest rates are an input in the pricing model for option premium. Higher rates will typically increase call prices.

More often, the put spread is more likely to qualify and hence advisors have experienced what we call the bull side in the strategy. An Iron-Condor simply refers to simultaneously holding both a short put spread along with a short call spread. The future use of the iron condor is always linked to what trades meet our strict requirements for entry.

While most advisors and their clients (you can admit it!) may have one or both eyes on this week’s NCAA basketball tournament, our traders will be watching the markets in case any adjustments are needed. As a reminder, if trades reach expiration day and expire worthless, your clients should see those positions noted in their transactions during the weekend. Typically, with a note saying removed due to expiration. As always if you have questions on the strategy or operational nature of the positions, don’t hesitate to give our office a call. Who knows, your question might be highlighted in a future article.