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HiPOS New Trade Update: Volatility Opportunities Remain High

New HiPOS Conservative Trade

Today ZEGA’s traders put on a new HiPOS Conservative trade for an August 19th expiration.

We’ve been noting how the VIX has remained elevated for some time. When there is more implied volatility, option premiums are more robust. When premium is elevated, we can find trades that qualify under our strict rules for entry.

Typically, we can also meet our profit targets at a much further out of the money short strike price.

You’ll notice as you read on that at the time of entry, the short 3200 by 3150 put spread was about 18% below the current level of the S&P 500 Index.

Reviewing The HiPOS Graph Above

A quick review of the normal attributes of the position graph.

We have the vertical dotted line showing the August 19th expiration date. Below the horizontal dotted line illustrating the short 3200 put strike. Then off course the daily chart of the underlying S&P 500 Index along with the purple curved line.

This shows where, should price fall below, ZEGA’s traders may take a more defensive posture to further manage risk.

Some might note that early on it is close to the index price.

As time moves forward, the line slopes down and to the right. This shows the effect of time decay but also how probabilities change of a market reaching the short spread. Part of what you are rooting for early is for price to trade sideways or higher to let the initial seasoning of the position happen.

The benefit of a short volatility strategy is you don’t absolutely need price to move higher (in the case of a short put spread).

Instead, you simply need price to go up, sideways, or not down too far too fast.

The market can go lower and potentially see a positive profit when markets do not go up. Selling volatility is about selling options that are pricing in larger moves than the resulting historical actual volatility.

We’ll leave it there for now, but off course we’ll be back with more updates.

 Now for the Particulars:

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike:3200
  • Long strike: 3150
  • Risk (prob. ITM): ~1% at time of entry
  • Targeted return: ~1.1%
  • Distance OTM: ~18% at time of entry
  • Expiration: August 19th, or 23 trading days until expiration