HIPOS Weekly Update: Late Friday Trading Window Opens with Some Risk Volatility Premium

by | Apr 10, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), Option Trading, S&P 500/SPX

Late Friday afternoon ZEGA’s traders found a trade that qualified for entry. As such, we moved back into the S&P 500 Index (SPX) from our previous Russell 2000 Index positions. This trade is targeting 1.2% return and it expires in 35 days on May 13th. We have a market holiday within this expiration window (Good Friday). Even when markets are closed, time premium (or Theta as traders call it) is ticking off the value of the positions which is a benefit for your clients.

While volatility has been muted, we saw a bit of a risk off posture in the markets going in to the weekend. This might be a combination of some geo-political events and upcoming elections in the Eurozone. While we are aware of potential market driving events, we generally abide by a strict set of rules that are non-reliant on a market posture like our Internet Advantage Strategy (IAS).

Above we have our normal purple exit curve. Our short leg is 2075 which was 12% below the current market at the time of entry. As always, remember the more time that ticks off towards expiration day without a material move in the index, the more depreciation in the spread which drives positive returns to our trade.  Finally, some advisors have asked whether we might find another call side trade (the new trade is the more traditional put spread). In this iteration, the call side did not meet our rules for entry like the put side did. If the call side moves in price and qualifies, our traders have discretion to add that side.

Many of you have had conversations with someone from the ZEGA team and understand that the call side trade and the resulting Iron Condor position are rather rare in occurrence. As always if something should materialize we’ll update you via our blog.

So now for the particulars:

Index SPX

  • Position type: Vertical spread
  • Short strike: 2075
  • Long strike: 2050
  • Risk (prob. ITM): < 0.50% at time of entry
  • Targeted return: 1.2% ($0.30 on a $25 requirement)
  • Distance OTM: ~12% at time of entry
  • Expiration: May 13th: 35 days to expiration at time of entry on April 7th