HIPOS Weekly Update: New Trade Entry on the Russell 2000 Index Options

by | Aug 9, 2017 | Alternative Income, HiPOS (High Probability Options Strategy), Option Trading, Technical Analysis, Volatility

Today as volatility spiked overnight the Russell 2000 Index sold off over 1% with its implied volatility rising enough to generate conditions that qualified for a HIPOS entry.

We placed a short spread trade on the Russell 2000 September 15th expiration options. At the time of entry this trade had 36 days until expiration. Like last time, this includes a US market holiday (Labor Day). As a reminder, each day that passes sees some time decay value come out of the price of the spread including weekends and holidays.

At the time of the trade the short strike of 1200 was 13.9% out of the money as we can see in the graph above. As usual, also pictured is the purple exit curve which represents various levels which our traders may utilize defensive measures to reduce risk. Each day that passes forward towards expiration day, the more room the trade has as that curve trends lower into expiration.

Your clients will want the underlying Russell 2000 Index (RUT) to remain as far above that curved line and 1200 short strike as possible. We will be back next week with a new update or sooner if conditions warrant. As always, feel free to contact ZEGA with questions on the strategy.

So now for the particulars:

 Index: Russell 2000 Index

  • Position type: Vertical spread
  • Short strike: 1200
  • Long strike: 1150
  • Risk (prob. ITM): < 1% at time of entry
  • Targeted return: 1.2% ($.60 on a $50 requirement)
  • Distance OTM: ~13.9% at time of entry
  • Expiration: September 15th: 36 days to expiration at time of entry