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HiPOS New Trade: How Volatility Sets Up New Trades for Entry

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

By Derek Moore

ZEGA’s trading team found a new short put spread position that met all our rules for entry.

With the pullback in markets today, volatility jumped causing option premiums to rise. This means we can sell spreads lower (further out of the money) for the same payoff. The increase in distance between the current S&P 500 Index and the short strike leg gives us more of a buffer.

Although this new trade follows on the heels of Fridays successful expiration at full profit, this pop in short term volatility is often what the team waits for when we have gaps between expiration and entry.

How Short-Term Volatility Pops Help HiPOS Trades Qualify for Entry

  • Increased volatility increases option premiums
  • Higher implied volatility in markets means selling premium further out of the money at same payoff
  • Increases distance between the underlying index and the short strike price
  • Easier for all ZEGA’s HiPOS rules for entry to be met

How To Read Our Normal HiPOS Graph Above?

  • The graph shows a chart of the S&P 500 Index (our underlying)
  • The expiration date is the vertical blue dotted line (October 15th)
  • The short strike of 3550 is in the horizontal orange dotted line
  • Darker curved defensive posture line in purple

A word on the defensive posture line which represents levels if price falls below the ZEGA traders may decide to adopt a more defensive posture.

This includes rolling positions, adjusting strikes, adding the other side (calls in this case), or any number of tools in ZEGA's box of options (I guess this was a pun, right?). Earlier in the trade, it has less room to breathe and the reason you should expect more volatility in the value of your accounts early.

ZEGA also has rules for the early part of the trade so not to get whipsawed just because the price pierces that curve, ZEGA has rules for when to act.

What To Root For?

  • Price to move higher, sideways, or not fall too far too fast
  • Volatility to decline now that we are in positions
  • Time to tick by to benefit from time decay
  • Early in the trade price to stabilize or move away (up) in direction from the short strike

As this trade moves along, we will be back with more updates.

Now for the Particulars

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 3550
  • Long strike: 3500
  • Risk (prob. ITM): <1% at time of entry
  • Targeted return: ~1.1%
  • Distance OTM: ~18.5% at time of entry
  • Expiration: October 15th or 19 trading days until expiration