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HiPOS New Trade Update: Going Where the Volatility Opportunity Is

New Trade

Today ZEGA’s traders put on a new HiPOS Conservative trade utilizing two separate short put spreads on the Nasdaq 100 Index (NDX).

You’ll notice both a 11125/11025 short put spread combined with a 11075/10195 short put spread. We used this combination to execute the trades which provide our targeted profit return of ≈ 1%. Note, we created our typical HiPOS graph above referencing the higher strike of the two.

Due to heightened volatility in the NDX, we sold the spread with a distance ≈ 20% out of the money from the current index price which creates a nice buffer given the shorter time frame.

Why NDX vs SPX?

While most of our recent trades have been concentrated in the S&P 500 Index, we always review each of the major indices and evaluate them based on return and risk.

This iteration went to the NDX due to a combination of the targeted return but also the distance out of the money between the current underlying price and the first short spread. With a May 6th expiration, this trade only has 14 trading days left until it expires. You might recall that some recent trades have been as much as 4-5 weeks in duration.

Higher volatility means getting further away with less time to expire.

What Are You Rooting For?

Short volatility spreads are a combination of volatility, time, and price of the underlying.

You want the NDX to move higher, stay where it is, or simply not go down too far too fast. With a 20% cushion between the current market and the short strike, it does have some room to maneuver. You’d like to see volatility subside a bit from current levels which would decrease premiums.

You also want time to tick by which will remove much of the built-in time premium.

Reading the HiPOS Graph

 While the position in its entirety is two separate spreads, for our purposes here we’ll focus on the 11125/11025 short put spread component.

The graph above has the NDX price chart, the short strike price dotted line at the bottom, and the vertical expiration date showing May 6th.The curved purple line represents levels where our traders may take a defensive posture on the position. You’ll notice that as the trade moves closer to expiration, that line drops further down and to the right. This reflects the erosion of time decay in premiums.

Earlier on in the trade as price oscillates, you tend to see more volatility in the value of positions.

As always reach out to a member of the ZEGA team with questions.

Now for the Particulars:

  • Index: Nasdaq 100 Index
  • Position type: Short Vertical Put Spread
  • Short strike:11125
  • Long strike: 11025
  • Short strike:11075
  • Long strike: 10975
  • Risk (prob. ITM): ~1% at time of entry
  • Targeted return: ~1.0%
  • Distance OTM: ~20% at time of entry
  • Expiration: May 6th, or 14 trading days until expiration