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HiPOS Trade Update: Accessing the Volatility Bank

By Derek Moore

New HiPOS Conservative Trade

Today ZEGA’s traders tapped into the elevated volatility levels in markets to identify our latest short put spread trade on the S&P 500 Index.

Our HiPOS strategies tend to find ample opportunities to implement positions when we see traders bid up premium in further out-of-the-money strike prices. Over the past week, as our prior trade expired at full profit, the VIX Index spiked higher.

VIX Index March 20th, 2023

Source: WSJ, FactSet

What this means for HiPOS is the ability to not only find trades that qualify under our strict criteria, but also find trades that have the requisite premium much further away from the current level of the market (SPX).

At the time of entry, the short put strike sat about 18% out-of-the-money.

Explaining Our HiPOS Graph Above

Our typical HiPOS graph shows the chart of the S&P 500 Index which is the underlying.

Then we have the dotted vertical line with the April 14th expiration date. The horizontal dotted line illustrating the short leg 3200 of our put spread. Finally, we’ve got the curved purple line.

This represents areas where if the price of the S&P 500 moves below, our traders may take a more defensive posture to further manage risk.

Short volatility trades benefit from time decay as evidenced by the line sloping down and to the right the closer we get towards expiration day.

What Are You Rooting For?

An easy answer is you want the market to move higher, which of course would also help your other strategies like ZEGA’s Buy and Hedge and Buffered Indexed Growth.

The markets can go up, sideways, or down. So long as they don’t move too far too fast down towards the short 3200 strike price. You also want time to tick by as each day more and more time value comes out of the trade.

I’ve referred to selling volatility akin to holding ice cubes in your hand where they melt away the longer you hold them.

I’ll also note, there are only 18 trading days until the April 14th expiration which includes Friday the 7th of April market holiday.

In theory, holidays and weekends enjoy time decay even though the markets aren’t open. Although the math on that is a little complicated. Part of the reason to leave the calculus to us.

Below we’ll include the usual specifications and we’ll be back with additional updates as we go.

 Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short put strike: 3200
  • Long put strike: 3150
  • Put Spread Risk (prob. ITM): <1% at time of entry
  • Targeted total return: ~1%
  • Distance Put Strike OTM: ~18% at time of entry
  • Expiration: April 14th, or 18 trading days until expiration