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HiPOS New Trade Update: The Votes Are in and Volatility Has Won!

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

By Derek Moore

HiPOS Conservative Update

The options market can be thought of as a type of voting mechanism. Implied volatility levels embedded in the prices transfer the opinions of how much markets are expected to move and the option values reflect that disposition.

After a few weeks of seemingly low volume indecision in markets, the last 2 out of 3 trading days have seen an uptick in volatility as markets retraced. Many point to the election and heightened VIX levels. We should point out though, that volatility has been elevated since February.

So, before we get to the details of a new trade a lot of advisors and their clients have been asking about HiPOS positioning around election day. HiPOS is about getting compensated (the return) for risk we are taking. Its also about thinking ahead and how we might adjust the position if need be. The calendar and volatility levels at multiple dates all are part of the equation.

For this trade, we utilized the Monday November 2nd expiration day. And yes, that is only 3 trading days after markets close today. With volatility moving materially higher, this trade became a choice for the strategy. This also provided an expiration date that is before election day on Tuesday.

We know that for HiPOS Conservative is typically 25 to 35 days to expiration in trades, so this is a rather unusually shorten time period. Also, the Monday expiration date is not a typical day for our trades either. While the election is Tuesday, with HiPOS being a rules-based strategy, if opportunities are identified that compensate your clients within our risk parameters, there may be a quick turnaround into another position.

 With higher implied volatility, we can find spreads that meet our rules. This includes things like days to expiration, distance out of the money on the short leg of our spreads, probability of expiring worthless, and the balance of premiums received versus the calculated risk.

This iteration called on the 2975 by 2925 short put spread strikes with a target return of 1%. You will notice on the graph above at the time of entry the spread was roughly 10% below the current levels in the S&P 500 Index. With this trade you will be rooting for the markets to hang around, go up, or simply not move too far too fast against the short leg of the spread.

Now for the HiPOS Conservative Updated Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short put strike: 2975
  • Long put strike: 2925
  • Put Spread Risk (prob. ITM):  <1% at time of entry
  • Targeted return: ~ 1.00%
  • Put Spread Distance OTM: ~ 10% at time of entry
  • Expiration: November 2nd or 3 trading days to expiration

 

HiPOS Aggressive Update 

HiPOS Aggressive will also be receiving a new trade today sharing the Monday November 2nd expiration date. Our traders were still finalizing the position as of this writing but wanted to give advisors utilizing this version some insight as well.

After back to back trades in the Aggressive sleeve for the last 2 months or so, we found the lack of volume in markets the last two weeks affected the risk/return profile in that available prices for the pairs of spreads typical in the strategy did not provide the right blend of short and long premiums.

With today’s volume extension, we were able to keep expirations short term and take in premiums commensurate with the strategy goals. With both versions of the strategy, they sometimes will remain in cash while the team is waiting for the right opportunity to re-enter. We would rather pick our spots and optimize the probability for success.

We will have additional details but for now expect a similar type position in HiPOS Aggressive.