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HiPOS Conservative Weekly Update: New March Trade is Upon Us

By Derek Moore

Today the ZEGA traders put money back to work in the HiPOS Conservative version of the strategy. With volatility remaining elevated and the S&P 500 Index continued weakness, they found a put side trade that qualified under our strict rules for entry.

If we look at the graph above, we see that at the time of entry, the index was about 16% above the short 3275 strike. As we’ve been talking about over the last several months, elevated volatility allows us to establish spread positions further out of the money and still retain the commensurate premium for the risk we are taking.

The purple curve line represents the area where if the S&P 500 Index falls below, ZEGA’s traders may decide to adopt a more defensive posture. That line continues to drop lower and to the right as time value ticks by in the spread.

So what to root for? Really it’s simple; the market to stay where it is, drift higher, or rocket higher. It can also go down, so long as it does not directionally drop too far and too fast. As always, each day that passes causes some time decay erosion in the value of the premium sold. This is a positive for you and your clients.

We will keep this relatively brief. Of course we will be back with updates as warranted and next week give more perspective on this trade.

Now for the HiPOS Conservative Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short put strike: 3275
  • Long put strike: 3225
  • Put Spread Risk (prob. ITM):  < 1% at time of entry
  • Targeted return: ~ 1%
  • Put Spread Distance OTM: ~ 16 at time of entry
  • Expiration: March 12th  or 14 trading days to expiration