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HiPOS New Trade Update: Halfway to an Iron Condor?

By Derek Moore

Today ZEGA’s trading team was able to locate a short call spread above the market residing at the 3500 by 3550 strike. One of the themes we have been talking about of late is this well-established higher volatility environment. Regular HiPOS strategy followers will understand that normally the call side of the trade does not qualify under our strict entry rules as there isn’t enough volatility to make the trade worth doing.

Higher volatility means these opportunities can arise more frequently. On the graph above, you will notice that the bottom half of the chart is cut off. This is not a mistake, but rather intentional as we wanted to point out where this short call strike is in relation to the old market highs in February.  3393.50 was the old high to be exact in the S&P 500 Index, which is the underlying index for this trade.

Doing some quick math tells us that 3500 is about 3.4% above where the market all time high sits currently. While we do not expressly base our short strikes on technical analysis, we often point this out because old highs provide resistance (top of the market) to a market breaking through those levels. Remember when call spreads are sold, you are rooting for the market to not move too high too fast.

Now in the title I teased an Iron Condor which is where we pair both a short call spread and a short-put spread at the same time. With the call side set, if the market should experience a short-term pullback and jump higher in volatility, we may look to also leg into the short-put spread side.

This current set up creates options (pun intended) within the strategy. We of course will be back with more updates should they warrant. In the meantime, you are fine with the market moving higher, just not too excitedly and too fast. Remember, the earlier we are in a trade, the less time value that has eroded from the premiums we have sold.

For now, have a good week and we’ll check in again soon.

 Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Vertical Call Spread 
  • Short call strike:3500
  • Long call strike: 3550
  • Risk (prob. ITM): <1% at time of entry
  • Targeted return: ~ 0.90%
  • Call Spread Distance OTM: ~ 10.5% at time of entry
  • Expiration: July 31st or 17 trading days to expiration