HiPOS Weekly Update: On the Goal Line

by | Oct 27, 2017 | HiPOS (High Probability Options Strategy), Option Trading, Volatility

While not wanting to start dancing in the end zone prematurely, our primary HIPOS trade is near the goal line as the spread position has 7 calendar days until expiration. With the sideways and slightly lower action in the underlying Russell 2000 Index, our short call spread position sits about 7.5% out of the money. This is a positive for your clients as we want the Index to remain as far below (in the case of short call spreads) as possible and off course for time to continue to tick off.

As we can see in our graph above, the closer we get to expiration day, the more of a buffer we have against not only the short strike price, but the purple defensive curve. Barring any large market moves to the upside, we would not expect to have much movement in the value of the positions prior to expiration.

While the current HIPOS short call spread continues to tick towards expiration, our traders also are monitoring any opportunity to add the bullish short put spread side to your clients’ accounts should we find a trade that meets our strict rules for entry. We also continue to evaluate the call side as well. We know that this current position marked only the second time in many years that we have seen a call spread trade qualify. You should know that the ZEGA team has always monitors and run the numbers for each side of the equation.

In a low interest rate and low volatility environment, often the call side simply does not have enough “juice” to be worth the squeeze when it comes to premium versus the risk. Recently an advisor asked what effect the Fed potentially raising interest rates might have on the strategy? In general, interest rates moving higher would theoretically add more to call premiums and subtract from put premiums. The effect would be more pronounced for longer maturity options than short ones simply because of the cash flows over a certain period inherent with interest received versus the cost of carry.

Should conditions change we will be back on here with updates. Otherwise we will check back in next week. As always reach out to the ZEGA team with any questions.