HIPOS Weekly Update: Volatility Fireworks Lead to New Entry

by | Jun 29, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), Option Trading, Volatility

Thursday’s spike in volatility has lead our HIPOS strategy to enter a new position. Last week we talked on the blog about why we sometimes choose one index versus another. This entry is in the Nasdaq 100 Index or NDX which recently has shown the highest implied and realized volatility.

We placed a short-spread trade using the NDX July 21st expiration. At the time of entry this position had 21 days until expiration. The short strike of 5000 was 12% out of the money from the index level at the time of entry.

One of the positives of the High Probability Options Strategy is the positions benefit from time decay. We sell premium and look for that to erode and expire at zero to realize a full profit. There are only 14 trading days in the roughly 21 days until expiration.

Of late we’ve used positions with expirations closer to 30 days. One of the reasons why we could bring in the time to expiration while still meeting our rigorous criteria for entry was the short-term surge in volatility in the NDX index.

As we move forward, your clients will want the index to remain as far above the purple curved line as possible and time to march forward. For those advisors new to using ZEGA (and thank you), the graph above helps to illustrate the distance between the index, the days until expiration, and the levels where ZEGA may take defensive action along the purple curved line.

One last point: With our HIPOS strategy, we look to right size the positions to ensure we are using the appropriate amount of capital towards trades. Sometimes smaller accounts receive a different trade. This is because some accounts would have had too much cash left due to the 100-point wide spread used. In those instances, our traders used a different position in the S&P 500 Index either by itself or combined with the Nasdaq 100 Index we outlined above.

We call this the remainder issue. Think of it this way. If you wanted to buy some oranges and they are $1 each. You have $7 in your pocket but they only come in bags of five. You could buy one bag but would have $2 left over and only 5 oranges. To get your full complement of 7 oranges you would have to find another bag of 2 or some singles to use all your capital. Spreads have requirements so at times we may have to fit in a different position to ensure we use the right amount of capital for your clients.

As always, hit us up with any questions.


So now for the particulars:

 Index: Nasdaq 100 Index

  • Position type: Vertical spread
  • Short strike: 5000
  • Long strike: 4900
  • Risk (prob. ITM): < 1% at time of entry
  • Targeted return: 1.2% ($1.20 on a $100 requirement)
  • Distance OTM: ~12% at time of entry
  • Expiration: July 21st: 21 days to expiration at time of entry


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