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HiPOS: New Upside Call Spread On

By Derek Moore

Today ZEGA’s traders were able to identify a short call trade above the market that met the strict entry requirement. With the S&P 500 trading around 3100 at the time of entry, the 3400/3450 strike prices were used. This puts the short strike roughly 9.5% out of the money (above) the current index level.  

We have commented in recent pieces how elevated volatility levels provide more opportunities for entry. Many of which are further out of the money and shorter in time to expiration. After the close today, this iteration will only have 23 calendar days and 17 trading days until its June 26th expiration. While the VIX Index is not around its previous March highs, it is still considered elevated at the 26 level. The target profit is about 0.90% for this trade.

With our last short put spread trade many asked about the possibility of legging into (selling short call spreads) and iron condor. For those new to the strategy, this is where you simultaneously have short call spreads above the market as well as short put spreads below the market.

ZEGA’s traders will monitor the volatility landscape and if there were a material increase in short-term volatility there may be a possibility of selling a put spread and legging into the aforementioned condor position.   We will let everyone know when/if this is the case.  

So, what are you rooting for with a short call spread? Really, you are fine if the market stays right where it is, goes down, or simply moves higher without moving too far too fast against our short call strike. While going down sharply would also be constructive for a short call spread, the reality is that many of you utilize HiPOS for no more than 10% - 20% of assets where appropriate. So, a material sharp drawdown would cause unrealized losses in your more core holdings.

Above in the graph you will notice that the purple curved line and short strike line are sitting higher above the market. That purple curve is where ZEGA may take a more defensive posture in the trade should the index breach those levels.

Now for the Particulars

  • Index: S&P 500 Index
  • Position type: Short Vertical Call Spread
  • Short call strike: 3400
  • Long call strike: 3450
  • Risk (prob. ITM): <1% at time of entry
  • Targeted total return: ~ 0.90%
  • Call Spread Distance OTM: ~ 9.5% at time of entry
  • Expiration: June 26th or 17 trading days to expiration