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HiPOS Trade Update: A Quick Turnaround

By Derek Moore

After Friday’s successful expiration ZEGA’s trading team was back at it finding a short S&P 500 Index put spread that qualified under our rules. You might remember in last week’s update I suggested a few things to look for going forward given the volatility environment.

First, that trades would more than likely be back to the typical 4 to 4 ½ weeks in duration. This one expires July 9th which is just a little over 4 weeks. Second, to expect more time in between trades. In this case my prediction on timing was correct but it was a quick turnaround from last month’s trade.

If we refer to the graph above, you can see the short 3600 put level. This is about 15% out of the money below the market. You see the time between today and the vertical 7/9 expiration line. You also see our typical defensive posture curve.

This line that curves down and to the right represents areas where we may look to become a little more defensive in managing risk. It is worth noting that early in the trade price has less room to maneuver.

As time decay kicks in, more runway is available for the underlying index to bounce around. By the way, you might remember me writing about this aspect early in the last trade where the market retraced a bit right after entry. Time decay is a benefit for us in a short volatility trade.

So, we will keep this update on the shorter side and get right to the numbers on this trade below. Remember that the market will enjoy a holiday on July 4th so one less trading day.

Now for the Particulars:

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short call strike: 3600
  • Long call strike: 3550
  • Put Spread Risk (prob. ITM):  < 1% at time of entry
  • Targeted return: ~ 1.1%
  • Call Spread Distance OTM: ~ 15% at time of entry
  • Expiration: July 9th or 22 trading days to expiration