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HIPOS: Condor Up!

By Derek Moore

Yesterday with the pullback in equity markets, we were able to find a short put spread HIPOS trade that qualified our entry rules. For some of you this might be a new wrinkle for HIPOS as this created an Iron Condor position. 

We already had the existing S&P 500 Index short call spread (2775/2825) with an expiration day of February 1st. Now a short put spread with the same expiration was added using the 2350/2300 strikes. As we can see on the HIPOS graph above, you are now rooting for price to stay right in the middle of the two positions. 

It can oscillate up or down so long as it does not move too far and too fast against the short strike prices. In creating this Iron Condor, we added an additional 0.9% potential return target to the account if the positions expire worthless. Between this new position and the existing short call spread return target of 1.05%, the total targeted return if both sides expire worthless is now 1.95%. 

A couple other tidbits. The February expiration date (Feb 1st) includes only 9 trading days and 11 calendar days. With this type of position there is now more daily time decay in premiums while adding more short volatility. You can also refer to the graph to see that we now have two areas (purple line) where the ZEGA trading team may look to take more of a defensive posture.

What is an Iron Condor?

For those that are new to the idea of an Iron Condor, it may seem a little different and confusing in what to root for with the underlying S&P 500 Index. However, the name, Iron Condor, of the total position is merely a combination of two short spreads. One a short put spread and one a short call spread out of the money from the current index.  

What are the Benefits to an Iron Condor?

The additional benefit to an Iron Condor is we don’t have risk on both sides of the market (up or down) but we may benefit from the return on both sides if they expire worthless.

We will be back next week or before if something should warrant an update.

The details of the trade are as follows:

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 2350
  • Long strike: 2300
  • Risk (prob. ITM): 1% at time of entry
  • Targeted return: 0.90%
  • Total Targeted return: 1.95% (original call spread +      new put spread)
  • Distance OTM: 10.7% at time of entry
  • Expiration: Feb 1st, 2019 or 11 calendar      days to expiration at time of entry