By Derek Moore
HiPOS Conservative New Trade Position
Today ZEGA’s traders used the continued elevated volatility levels to identify a new short put spread trade for accounts.
This iteration was on the shorter side in time to expiration using the Friday November 4th date which encompasses only 12 trading days. The higher volatility continues to allow us to find trades that qualify under our strict rules. At the time of entry, the short 3150 put leg was about 15% below the current market price.
This is the distance out-of-the-money (OTM).
Speaking of Volatility (VIX Index)
Source: TD Ameritrade ThinkPipes
Above we see the VIX Index over the past year.
Lately instead of spiking higher, it’s been a slow steady uptrend in volatility. A bit more orderly without the surge above 40 or 50 levels. Some have pointed to this lack of capitulation but for our purposes, we enjoy higher volatility as it is a riper environment for short volatility selling. Longer term HiPOS users might remember trades expiring and then a week or longer passing until the next trade qualifies.
But in this regime, we can stack trades one after another.
What Are You Rooting for and the HiPOS Graph
Since we are short a put spread, ideally, you’d like markets to move higher from here and extend the distance OTM.
A sideways to down market works alright as well. So long as it doesn’t drop too far too fast. We always point out in the graph at the top that the purple curved line represents areas where our traders may take a more defensive posture. Early in the trade, it has less room to breathe so in the early part of trades, ideally, we are sideways to up. You see this in how that curve slopes down and to the right towards expiration day.
As the calendar ticks by, the positive effect of time decay starts to kick in and erode premiums.
It’s also worth mentioning a drop in volatility levels would also help the pricing of positions.
We’ll leave it there for now but as always reach out to a member of the ZEGA team with questions.
Now for the Particulars:
- Index: S&P 500 Index
- Position type: Short Put Spread
- Short call strike: 3150
- Long call strike: 3100
- Put Spread Risk (prob. ITM): < 1% at time of entry
- Targeted total return: ~1.1%
- Distance Put Strike OTM: ≈17.8% at time of entry
- Expiration: November 4th, or 12 trading days until expiration