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HiPOS New Trade Update: No Recount Needed in Volatility Market

By Derek Moore

While the markets have moved strongly higher in the post-election day trading sessions, volatility remains elevated. This volatility results in an easier path for trades on both the short call side and short put side to qualify under our rules.

As such today ZEGA’s traders were back in with a short call trade on the underlying S&P 500 Index. For this trade, we utilized the 3810/3860 short call spread legs which at the time of entry was around 8.5% out of the money. The higher volatility regime continues to keep the call side in the running for consideration and this time is no different.

The other thing higher volatility means is the ability to enter trades with shorter time to expiration than most are accustomed to. This one is a two-calendar week trade with a Friday November 20th A.M. expiration.  For those of you that might need a refresher, the last day to trade is the Thursday November 19th session with the settlement price determined by the opening prices of all the stocks contained in the S&P 500 Index opening rotation on Friday November 20th morning.

Back to the point about shorter time to expiration: this is available because premiums are higher with higher implied volatility so the requisite distance we allow out of the money can be satisfied commensurate with the premium received exceeding the risk taken. That is a long way of saying the juice is worth the squeeze and we do not have to go out to our normal 4-5-week trades to get that opportunity.

Before we get to the particulars, a refresher on our normal HiPOS graph above. You will notice the purple curve is set above the market since this is a short call spread. You and your clients are rooting for the market to stay below both the purple line and the short strike of 3810. When a market exceeds the purple curve at certain times during the trade, the ZEGA traders may take a more defensive posture in the management of the positions. Up a little, sideways, or down are all fine for this construct.

Of course since many of you are also invested in our long hedged equity strategies, you’d like the market to go up just enough to not cause issues on this smaller allocation to your overall strategy with us.

Now for the HiPOS Conservative Updated Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Call Spread
  • Short call strike: 3810
  • Long call strike: 3860
  • Put Spread Risk (prob. ITM):  <1% at time of entry
  • Targeted return: ~ 1%
  • Put Spread Distance OTM: ~ 8.5% at time of entry
  • Expiration: November 20th or 10 trading days to expiration