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HiPOS New October Trade Update

By Derek Moore

New HiPOS Conservative Trade

As we referenced in last week’s update volatility has remained on the higher end of late.

This enabled ZEGA’s traders to jump from Friday’s expiration to today’s entry without any days in between. That higher implied volatility also set up the ability to put on a trade with only 3 weeks until the October 20th expiration. In trading days it’s only 14 days after today.

At the same time the distance out of the money was over 10% between the S&P 500 Index (the underlying) and the short 3850 put strike in the credit spread.

Reviewing The HiPOS Graph

Above you’ll notice our usual graph showing the chart of the underlying, a horizontal orange dotted line representing the short put strike price, and the vertical line marking expiration day.

We like to explain that the purple curved line dips down and to the right. The reason why is that as trades move along closer to expiration, the time value and probability of reaching the short strike area decreases. Early on trades have less room between the underlying and the curved line.

ZEGA has rules that govern the seasoning period right after entry and beyond.

Every time we do an update, we’ll put in an updated HiPOS graph so you can follow along.

What Are You Rooting For?

Simply, you want the market to hold or go higher from here especially in the beginning stages.

Once things progress, up, down, or sideways works. You just don’t want markets to move sharply against the short strike. Ideally, you’d like to see implied volatility drop lower from where it was at entry. The time left to expiration, volatility, and the underlying price are all inputs into how options are priced.

Interest rates are less of a factor in shorter-term trades but still are part of the options pricing model.

As sellers of volatility, we want to bring in a credit and then have the trade eventually expire worthless to realize a full profit.

This one will be a shorter time frame but of course we’ll be back with updates each week until expiration.

Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short put strike: 3850
  • Long put strike: 3800
  • Put Spread Risk (prob. ITM): < 1% at time of entry
  • Targeted total return: ~1%
  • Distance Put Strike OTM: ~10.3% at time of entry
  • Expiration: October 20th, or 14 trading days until expiration