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HiPOS Trade Roll Update: Taking in More Premium While Moving Further Away

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

By Derek Moore

Explaining the Early Roll of the HiPOS Conservative Position 

Today ZEGA’s traders made the decision to capitalize on the sustained higher volatility by rolling the current short put spread trade out to a March 18th Expiration.

When we do a roll, it involves simultaneously buying back the current spread, and selling the new put spread. In this case, we took in a credit that has a target of earning another 1.1%. We also realized most of the profit on the old position while getting further out of the money (further away) than where we currently sat.

With a March 18th expiration, we added an additional 14 trading days while taking in that additional 1.1% credit.

What Are You Rooting for With the New Position?

Let’s break this down into what you want early in the trade and then overall.

Looking at the graph above, we always point out that early on, there is less distance between the current market price of the S&P 500 Index (our underlying), and the curve. As time goes by, the trade has more and more room to breathe. This curved line represents areas where ZEGA’s traders may take on a more defensive posture.

As time decay kicks in, that curve moves lower the further towards expiration day highlighted by the blue vertical line.

Ideally on this one, we’d see the market stabilize or at least not move lower too far too fast.

Then a reduction of volatility would ease premiums. As sellers of volatility, we want the value of the spread to eventually move to zero. When volatility moves lower, that component of option prices is reduced. Of course we also benefit from the days going by on the calendar as time decay plays a nice role.

One of the benefits of this strategy is the potential to generate returns even if markets move lower.

Or higher, in cases where we are short a call spread. As always if that opportunity to layer on the other side (calls) materializes, we will be back with an update. Generally, we probably wouldn’t see that unless markets moved strongly higher first.

So, enjoy the 3-day market holiday and we’ll be back next week with another update!

Now for the Particulars:

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 3400
  • Long strike: 3350
  • Risk (prob. ITM): ~1% at time of entry
  • Targeted return: ~1.1%
  • Distance OTM: ~21% at time of entry
  • Expiration: March 18th, or 19 trading days until expiration