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HiPOS Trade Update: Call Time Again

Buy & Hedge HiPOS (High Probability Options Strategy) S&P 500/SPX Volatility ZBIG (ZEGA’s Buffered Index Growth)

By Derek Moore

Today, after only expiring last Friday, ZEGA’s traders were able to produce a quick turnaround in finding a new qualifying short call spread. After seemingly going several years without the ability to find call trades that meet our rules, it has become commonplace of late.

The ability to find a new trade so soon and being on the call side are correlated. As you may have noticed, while volatility is lower than the March highs, it remains elevated compared to its historical level. This helps us find trades that have both the required distance away  from the current market price and helps us find the premium required to compensate for the risk.

This also means that unlike say 2017 where we might have to wait several weeks to find new positions, lately we have essentially been able to roll from one expiration right into new trades. As a reminder, HiPOS as a strategy historically spends over 100 days per year in cash. This is another benefit of trading a short volatility strategy when “volatility” is elevated and somewhat stable.

Above you can see our normal HiPOS trade graph. You will notice that the short strike line is above the current market. So, you are rooting for the market to just hang around where it is, or not go up too sharply too fast, going down off course works as well.  Since many of you have most of your assets in a hedge equity strategy like ZEGA’s Buy and Hedge Strategies or our ZBIG Buffered Index Growth, while both of those have downside protection or buffers, you are not rooting for a downturn in those.   Therefore, we are rooting for a slow consistent upward trend in the market for August.

One further point, sometimes we get questions about whether the trading team brings in fundamental or technical analysis in picking the strike prices or side of the trade. As we have communicated frequently, HiPOS is a bit agnostic in that it is a long-term rules-based strategy that happens to utilize short term vehicles to express that methodology. We do not try and pick tops and bottoms or direction, but it is worth noting that the short strike price sits above the old all-time high in the S&P 500 Index that reached 3,393 back in February by more than 5%.    Often, old highs can act as resistance points in the market and sellers rush in when those prices are reached.   

 Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Vertical Call Spread 
  • Short call strike:3575
  • Long call strike: 3600
  • Risk (prob. ITM): <1% at time of entry
  • Targeted return: ~ 1.2%
  • Call Spread Distance OTM: ~ 8.4% at time of entry
  • Expiration: August 28th or 18 trading days to expiration