HiPOS Conservative New Trade Update: How to Explain Our Iron Condor Position to Clients
By Derek Moore
Explaining The Addition of a Short Put Spread to HIPOS Conservative Forming Iron Condor
Wednesday ZEGA’s trading team saw an opportunity to add to our existing short call spread by selling a short put spread deep out of the money.
When you combine a short call spread with a short put spread, the total position is referred to as an iron condor. By adding the put side, we added additional short premium to accounts and raising the total potential max profit.
The benefit is your clients now are positioned to capture volatility on both sides of the trade.
What Do I Root for With a Short Iron Condor Position?
You want the market to stay nicely situated in the middle away from both short strikes on either side.
Short iron condors can be difficult to get a handle on first. But really you are alright with the market not moving much. Given the trade is closer to the short call strike currently, a little move downward would be welcome news.
Since you’ve sold volatility on each side of the market you also get double the time decay benefit in addition to the additive premium to our total targeted return for the trade.
How to Read the Trade Graph Above
For this graph we double up on the purple curved risk line as well as the dotted short strike areas.
The expiration stays the same, but you can see we now have separate curves where our traders may take more of a defensive posture should price breach after the initial seasoning period in the position.
The key thing to convey to your clients is we want price to remain not only inside the short strikes, but also between the curves.
Why Don’t You Put on Both Sides Every Trade?
Given the choice we would but typically only one side (calls or puts) meets all our criteria at the same time.
The other issue is depending on how far along towards expiration, there might not be enough time left in the existing leg to pair it with a corresponding short leg.
Iron condor positions always share the same expiration date as there is not an additional cash or margin requirement for the extra side since a cash settled index option cannot be assigned on both sides at the same time.
So, we will leave it here for now.
This is one of the few times I am a day late on posting any type of trade update for HIPOS Conservative but with posting our updated performance numbers already and a few other things it got delayed by a day.
As always reach out to a member of the ZEGA team with questions and I’ll be back with more updates as we go along.
Now for the Particulars: Updated for Iron Condor
- Index: S&P 500 Index
- Position type: Short Iron Condor Spread
- Short call strike: 4900
- Long call strike: 4950
- Short put strike: 3975
- Long put strike: 3925
- Call Spread Risk (prob. ITM): ~2.5% at time of entry
- Call Distance OTM: ~6.5% at time of entry
- Put Spread Risk (prob. ITM): <1% at time of entry
- Put Spread Targeted return: ~1%
- Put Distance OTM: ~14.5% at time of entry
- Total Iron Condor Targeted return: ~1.9%
- Expiration: December 3rd or Updated 14.5 Trading Days