facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog search brokercheck brokercheck
%POST_TITLE% Thumbnail

HiPOS Conservative Trade Update: A Side of Short Calls Added

HiPOS (High Probability Options Strategy) Option Trading S&P 500/SPX Volatility

By Derek Moore

Friday ZEGA’s traders were able to leg into an iron condor position by selling a call credit spread. This one also expires this Friday October 2nd. Which if you pull up any calendar, is only 4 trading days away. Some of you might be asking how you found a short call spread that qualified this close to expiration? Volatility!

With implied volatility heightened in the market, we were able to get far enough away and still capture the requisite premium. At entry on Friday the S&P 500 Index sat around 6.2% above the short call leg. With the call side of our HiPOS trades, you might notice that the distance out of the money required is not as large as the put side.

The reason can get a little complicated quickly, but the main thing is that puts tend to have more embedded premium. But unlike the put side which during a market selloff sees volatility spike, the call side tends to see volatility drop or at least stay relatively constant when the market moves higher. When you are short volatility as we are, rising volatility can contribute to unrealized adverse movement in the value of spreads. 

So, this week what do you want to happen? Nothing really. Ok, all kidding aside, you really want the market to do nothing and stay flat. Keep it in the middle of the fairway if you want a golfing reference. Of course some movement is fine so long as the market does not move too far and too fast. Time decay will also kick in quickly this week as we get closer to expiration. 

Finally, with so much talk about election volatility and October as a dangerous month, a couple thoughts:   MarketWatch ran a piece talking about just that. What they found was that yes October is more volatile than any other month averaging 1.43% standard deviation from the average historical month change. Compared with the average of 1.09%, yup it’s more volatile. 

When the article was passed along to me, I immediately thought 1987 and 1929 surely would skew this as those crashes both happened in October. Nope, they mentioned that in the piece as well where taking both out still resulted in the month being the most volatile. 

The good news is that implied volatility is already high. This, as mentioned above, is what let us put on a one week trade that qualified. When realized volatility is higher than implied by a lot, that can surprise markets. Second, through some research it seems that while more volatile, October on average is neither better or worse or outsized when looking at average returns by month. Nor is it outsized when averaging out the down years over a long historical period. 

As the article points out, volatility for investors might provide opportunities to get into things you missed. And since this is a HiPOS article, many of you also have a hedged equity strategy with built in protection. So yes, historically it is more volatile, but trying to time markets is not a good long-term strategy.

Now for the HiPOS Conservative Updated Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Iron Condor Spread 
  • Short put strike: 2700
  • Long put strike: 2650
  • Short call strike: 3465
  • Long call strike: 3515
  • Put Spread Risk (prob. ITM):  <1% at time of entry
  • Call Spread Risk (prob. ITM): < 2% at time of entry
  • Targeted return: ~ 1.95%
  • Call Spread Distance OTM: ~ 6.2% at time of entry
  • Put Spread Distance OTM: ~ 16.5% at time of entry
  • Expiration: October 2nd or 5 trading days to expiration

HiPOS Aggressive Update: Full Profit Plus

On Friday, the short NDX put spread expired worthless meaning at a full profit. Despite the market selling off on several days last week, the spread never really was threatened in a meaningful way. On the worst selloff day, the long SPX spread did its job and provided an offset to unrealized losses. This is what it was designed to do.

The only other tidbit I will mention is that ZEGA’s traders were able to squeeze more than the original target profit. We will call this full profit plus a bonus. With plus being added to everything these days (ESPN+, Disney+ etc), what this means in the aggressive HiPOS is that some remaining premium left on the protective long SPX put was harvested on the second to last trading day to add another +1/2% kicker to accounts.

So, when is the next HIPOS Aggressive trade? Our early calculations tell us to expect to be in cash for several days until the right opportunity arises again.

We will be back with more updates later in the week.