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HiPOS Trade Update: A Volatility Opportunity

By Derek Moore

Today’s pullback and increase in volatility provided the ZEGA trading team an opportunity to put money right back to work after last week’s successful HiPOS expiration. The rise in volatility allowed a trade to qualify which met the many stringent rules for entry we have.

This one has 22 trading days to go until expiration with a profit target of around 1.0%. You’ll notice from the graph above that the uptrend has continued for the SPX and the short 3700 strike of our short put spread sits roughly -16.5% out of the money.

Due to the strong uptrend we’ve been in, the chart does elongate that purple curved line. The purple curve represents areas which if the S&P 500 Index should close below, the ZEGA traders may take on a more defensive posture.

The other aspect of the defensive posture line is how quickly it falls off and down to the right. That is because the earlier part of the trade is the most sensitive usually. During this period, you’ll see the current market value of the spread bounce around between unrealized gains and losses.

A question we have been getting lately is: What about legging into an Iron Condor by selling a short call spread above the market to match up with the current short put spread? We’ve been getting that more and more after successfully implementing that tactic several times over the past year and a half.

It is something our traders are always monitoring and yup, we have rules for this. A hint, it usually involves markets moving to higher highs and additional option metrics involving volatility levels. Don’t worry though, we will update you if that occurs.

So, for now, what are you rooting for? In the near term, you want the SPX to sort of stabilize here or move higher. Slightly down is alright as well. What you are rooting against though is a sharp sudden move materially lower in the index. Off course you also want the calendar to move along and tick by to realize that time decay.

As we move on though the life of the position, up, down, or sideways works. As long as before expiration there are no moves of a magnitude that would get too close to our short 3700 put strike. As always, reach out to a member of the ZEGA team with questions about the position or the right fit for your clients in their portfolios for short volatility strategies.

Now for the Particulars

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 3700
  • Long strike: 3650
  • Risk (prob. ITM): <1% at time of entry
  • Targeted return: ~1.0%
  • Distance OTM: ~16.5% at time of entry
  • Expiration: September 17th or 22 trading days until expiration (Including Labor Day Market Holiday)