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HiPOS Trade Update:

Buy & Hedge HiPOS (High Probability Options Strategy) Interest Rates Option Trading S&P 500/SPX Technical Analysis VIX Volatility

By Derek Moore

New HiPOS Conservative Trade Entered 

Today ZEGA’s traders took advantage of the market retreat and increase in implied volatility to put on a short put credit spread roughly 10.5% OTM (Out of the money). 

You might remember last month’s trade was a bit longer in duration due to lower volatility levels. This short-term spike allowed for a position that expires September 29th, but only has 16 trading days left after the close this afternoon. While a retracement or selloff isn’t required before entering trades, it is helpful for the reasons stated above. Historically the put side tends to qualify under our rules more often than the call side hence the helpfulness of retracements. 

The underlying asset in this trade is once again the S&P 500 Index.

We use index options for a variety of reasons but two of them stand out.

  • 60/40 Tax Treatment as 1256 Contracts
  • European Style Cash Settlement Meaning No Early Assignment

Plus, index options are deep liquid markets.

Reviewing the HiPOS Graph Above

We can see the chart of the S&P 500 Index along with a few markers.

Expiration day is outlined in the vertical blue dotted line. The short strike leg in our put spread is highlighted by the horizontal orange dotted line. Finally, our normal purple curved line, which signifies areas should price break below it ZEGA’s traders may take a more defensive posture. 

Someone recently asked a question “doesn’t price sometimes go below that curve shortly after the trade is entered”? 

It will, especially how close price and the line are in the early days of the trade.

Without revealing any of our internal rules, ZEGA does have some guidelines during this “seasoning” period. The line falls lower and to the right as time passes along. This reflects how short options lose time value (a positive for premium sellers) each day. We want the positions we’ve sold at a credit to eventually expire worthless to realize a full profit. 

Early on though, the price of the spread is much more sensitive to price of the underlying.

What Are You Rooting For?

Ideally, you’d like to see the S&P 500 firm up here and either trend sideways for a bit or move higher.

This starts to provide a little more breathing room. The reality with HiPOS is that so long as price doesn’t move sharply lower too early in the trade, it generally can go down, sideways, or up in the case of a short put spread. The other piece is volatility.

You’d like volatility to drop now that a trade is on as that will help the value of the spreads as well. That and the calendar moving forward so the positive benefit of time decay starts to kick in. 

With that we’ll say as always reach out to a member of ZEGA’s team with any questions. 

Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short put strike: 3975
  • Long put strike: 3925
  • Put Spread Risk (prob. ITM): < 1% at time of entry
  • Targeted total return: ~1%
  • Distance Put Strike OTM: ~10.5% at time of entry
  • Expiration: September 29th, or 16 trading days until expiration