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HiPOS Trade Update: Calls over Puts Continues

By Derek Moore

HiPOS Conservative New Trade

A new trade was executed in our HiPOS Conservative version today on the call side. This trade came adjacent to the most recent expiration that occurred this past Friday where we saw a successful full profit realization.

The index we used once again is the Russell 2000 (RUT). As the Russell continues to mint fresh all-time highs, the 2100 by 2150 short call spread was the flavor of choice. The short 2100 strike sits about 11% above the current market level and has a December 31st expiration date.

Above you see our normal HiPOS graph where the expiration date, current level of the index, and purple defensive posture line reside. The purple line represents an area that if the index moves above after our initial cooling off period, the ZEGA traders may take more defensive action in the portfolios.

Source: CNN Fear and Greed Index 

Of late we have seen the ratio of puts versus calls drop down to levels not seen for some time (see graph above). This simply measures on a relative basis the volume of each against one another. This may play into the fact that the probability on this call side trade is lower than we have witnessed in recent memory.

Lower probability in this case means a lower probability of a market getting beyond the short strike. So, lower the better if we still are receiving the right compensation for the risk that we are taking on.

The other aspect of this trade you might notice is the higher than normal target profit.  When it all settles the target will be around +1.7%. This was a result of really two things in our calculus. First, the premium available on the call side on a relative risk basis was higher than we have been seeing in the past. Second, this gives us some flexibility to close (pay to buy back) early and take profits if the market moves lower.

Of course, we also may just let this ride out through the end of the year. At the same time, should the market experience a material pullback, we also maintain flexibility to also execute a short put spread, thus legging into a short iron condor position.

Now for the Particulars:

  • Index: Russell 2000 Index
  • Position type: Short Call Spread
  • Short call strike: 2100
  • Long call strike: 2150
  • Call Spread Risk (prob. ITM):  1.5% at time of entry
  • Targeted return: ~ 1.7%
  • Call Spread Distance OTM: ~ 11% at time of entry
  • Expiration: December 31st or 17 trading days to expiration


HiPOS Aggressive Update:

On the HiPOS Aggressive strategy side, you might have noticed a few things within the accounts. First, we got a partial fill (~20% of the account) on a combination long SPX call trade and short RUT call trade. This is our typical pairs trade we have, where we look for one long call spread index position to help hedge the short call side on a different index.

Since we did not execute to the entire desired position size before the market moved, we then instituted a single sided short call spread on the S&P 500 Index (SPX). So, the blended positioning in the accounts includes both the pair and standard conservative like signal spread positions. 

The expiration date on all of these positions is December 18th which after today will only include 9 more trading days. For you and your clients, you would like the market on both the RUT and SPX to move lower or at least hang around where they are today over the next two weeks. As of right now for the partial pair, the RUT is sitting about 5.5% below its 2000 short strike and the SPX is 4.8% below the 3860 long strike.   In additional, the single SPX spread is sitting roughly 5.8% below its short 3900 strike.

We will update you here with any adjustments to this or conservative and of course be back next week with another update.