HIPOS Weekly Update: Volatility Holiday Over? New Position Entered.

by | May 18, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), Option Trading, S&P 500/SPX, Volatility

After a seemingly endless amount of news stories and CNBC prognosticators opining about how low volatility has been, today was a surprise to some. Volatility spiked and the major averages were off 1.5% to 2.5% across the board as of late trading. Long time advisors utilizing our HIPOS (High Probability Options Strategy) know that since we are net sellers of option premium, we often wait for short term spikes to capitalize on.  While we don’t try and time the market, the result of being patient often leads to entries after sell offs.

In 2017, we’ve written previously about this being the year of capitalizing on short term openings where markets provide a trade that meets our strict criteria for entry. We know that advisors are adding new money to HIPOS so for clients that may be unfamiliar with the graph above, here are a couple of points. The short strike is represented in the yellow line below the market. The distance between the market at the time of entry and the 2075 level in the S&P 500 Index was about 12%. The purple exit curve represents areas where if the market breaks on the corresponding day our traders may choose to take defensive action.

One other note, this trade includes the Memorial Day holiday. Time premium erodes every day including weekends and holidays which provides a benefit for your clients in the trade. So even when markets are closed (and not exposed to daily risk), the option analytics can work in our favor.

So now for the particulars:

 Index: S&P 500

  • Position type: Vertical spread
  • Short strike: 2075
  • Long strike: 2050
  • Risk (prob. ITM): < 1% at time of entry
  • Targeted return: 1.2% ($0.30 on a $25 requirement)
  • Distance OTM: ~12% at time of entry
  • Expiration: June 16th: 29 days to expiration at time of entry