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HiPOS New Trade Update: How Higher Volatility Benefits the Strategy

New HiPOS Trade 

Today ZEGA’s traders put on a new short put spread on the S&P 500 Index.

Given that volatility remains elevated in our current environment, we identified a targeted +1.4% profit with a distance out of the money of about 17% at time of entry. When volatility is higher it not only allows for a rapid reinvestment of funds after a previous trade expires, but also makes it easier to find trades that qualify based on ZEGA’s rigorous rules for entry.

This trade is a June 30th expiration with 20 trading days until the close that day.

Explaining the Trade Using Our HiPOS Graph Above

Above we see our typical price chart of the underlying index (S&P 500), purple defensive posture curved line, short strike price, and expiration date.

The distance 17% out of the money at inception is the distance or space between that last price bar and the horizontal short strike 3400 dotted yellow line. Expiration date of June 30th is represented by the vertical dotted blue line. Then our purple line sloping down and to the right.

The purple line represents areas should price close below after an initial seasoning period, ZEGA’s traders may take a more defensive posture further managing risk.

Risks at Different Points in a Trade’s Lifecycle

You might remember me saying in previous articles that HiPOS trades have more risk earlier on.

What this refers to is that should price move against us sooner after entry, accounts will see unrealized losses on the spread. You can see this relationship looking at the purple curved line. The reason why is that time decay has not kicked in. Later as the trade moves towards expiration, markets have more room to breathe evidenced by the line moving down lower on the graph.

Very close to expiration has its own risk and therefore ZEGA has various rules across all points in a trade.

As always reach out to ZEGA with questions on HiPOS or any strategies.

 Now for the Particulars:

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike:3400
  • Long strike: 3350
  • Risk (prob. ITM): ~1% at time of entry
  • Targeted return: ~1.4%
  • Distance OTM: ~17% at time of entry
  • Expiration: June 30th, or 20 trading days until expiration