HIPOS Weekly Update: Trade Day

by | Jan 12, 2018 | HiPOS (High Probability Options Strategy)

After running the numbers today ZEGA’s traders were able to find a short call spread trade that qualified under our rules for entry. Over the history of the HIPOS strategy, the times we have utilized the call side have been infrequent at best. We know that most advisors and their clients get used to the short put spread trades. So once again, you will need to re-center what market outcomes you are rooting for.

The underlying index chosen was the Russell 2000 Index or symbol: RUT. Above in the normal graphic you’ll notice that the short strike of 1695 lies just over 8% out-of-the-money. The major difference with a short call spread is that you are looking for the underlying market to remain as far below that strike as possible. You also want the index to remain under the purple defensive action line. As always, the more time that ticks by, the more room the position has to breath.

While this position, like the put side, benefits from time decay, the volatility component works a little different. As a short volatility strategy, typically volatility going higher hurts the positions while volatility contracting and moving lower helps the position. On the put side if a market were to move aggressively towards the short strike price, volatility spiking would have a detrimental effect.

With a short call spread, if there was some aggressive move higher towards the short leg, volatility most likely would stay constant or even drop lower. The ZEGA team will still be looking to manage risk if something like that happened, but it is worth noting the difference between the two sides of the trade.

So now for the particulars:

 Index: Russell 2000 Index

  • Position type: Vertical spread
  • Short strike: 1695
  • Long strike: 1720
  • Risk (prob. ITM): 1% at time of entry
  • Targeted return: 1.2% ($.30 on a $25 requirement)
  • Distance OTM: ~8.1% at time of entry
  • Expiration: February 18th : 35 days to expiration at time of entry


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