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HiPOS Conservative Update: New Trade Marinating

After the successful expiration of the most recent trades in the S&P 500 Index resulting in a full profit realized, ZEGA’s trading team was back at it Monday. For this iteration we found a short Nasdaq 100 Index (NDX) put spread.

Some of you may not have seen a HiPOS Conservative trade involving the NDX but this, along with the SPX and RUT, are part of the normal scan with which we run our calculations through to find trades which qualify under our strict rules. In this case, the NDX provided the best risk to reward characteristics.

Since the short 11200/11150 put spread was put on Monday, the underlying NDX has moved lower against the positions. We always say that early on to expect prices to move around more as the trade has not yet had time to season. Like marinating food with your favorite seasoning, it takes a little time to taste the flavor and realize the benefit.

For short volatility trades, the seasoning is time decay. A short spread price can be affected by changes in volatility, underlying price, time decay, and interest rates. In the case of interest rates, our short term HiPOS trades are rarely affected by this component. With the current position, both price moving lower and volatility rising have caused an increase (negative) in the value of the position.

At the same time, the positive benefit of time passing has not yet moved along far enough to realize that much benefit just yet. If you refer to our normal HiPOS graph above, the purple defensive posture line price right around or higher in the first few days than it. As time passes, more and more of the value attributed to the time component dissolves and this becomes more of a realized benefit.

We have several rules that let trades “marinate” and settle a bit in the early part of the position. I know some of you might also be thinking, why not short call spread at the same time? That is always a possibility but would depend on the market. In general, we would most likely need to see a push up in the NDX price for that to happen among some other internal things. But yes, if that side were to also qualify, it remains an option.


Now for the Particulars:

  • Index: Nasdaq 100 Index
  • Position type: Short Put Spread
  • Short call strike: 11200
  • Long call strike: 11150
  • Put Spread Risk (prob. ITM):  < 1% at time of entry
  • Targeted return: ~ 1%
  • Call Spread Distance OTM: ~ 16% at time of entry
  • Expiration: June 4th or 17 trading days to expiration