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HiPOS Trade Update: Entering an Iron Condor Position

Hedging HiPOS (High Probability Options Strategy) Interest Rates Option Trading S&P 500/SPX Technical Analysis Volatility

By Derek Moore

Explaining the New HiPOS Conservative Short Iron Condor Trade

Don’t let the name confuse you!

An ‘Iron Condor’ is simply a combination of a short call spread above the market and a short put spread below the market. When you hold both of those positions simultaneously, the profit and loss graph resembles a flying condor bird. Now that we have passed the naming convention, let’s get into the details a bit.

HiPOS is about selling volatility premium via short spreads.

We sell premium and look for it to eventually erode to zero by expiration day to realize a full profit.

This time we sold premium on both sides of the market. The February 9th expiration date was chosen with a target profit of about 1.2%. Given we have a market holiday Monday, that leaves 21 trading days remaining after the closing bell today.

The reason for establishing positions on both sides of the market is that both sides qualified under our strict rules for entry.

Since the market can’t be in two places at once, the risk doesn’t increase while the total premium collected wound up being more thus raising the target potential profit.

Reviewing the HiPOS Graph

This graph may look a little different in that there are two purple curved lines.

With trades above and below the market, the curve (if you tilt your head to the left) resembles a bell curve. You also notice the short 5100 call strike above the market represented by the orange dotted line and the short put strike 4225 below the market with its own dotted line. One way to look at the graph is ideally the price of the underlying S&P 500 Index remains not only between the dotted lines, but as close to the middle of the purple curve as possible.

If price were to deviate above or below the curve, ZEGA’s traders may decide to take a more defensive posture to further manage risk.

As time ticks by towards the February 9th expiration date those curves move further up and to the right (short call spread) and down and to the right (short put spread).

This is representative of how time decay, which is a positive for premium sellers, helps to erode the time premium and lesson probabilities of the market getting to one of the short strikes.

What Are You Rooting For?

Well, I kind of gave it away but sideways price action.

This would keep the underlying price well between the purple curve and short strikes while letting time decay do its thing. As we mention each time we have a new trade, the underlying market can go sideways, up or down, so long as it doesn’t move too far too fast against one of the sides of the trade.

Having a short iron condor trade on can make rooting a little more complicated but the same principles apply.

We’ll be back with more updates as the trade progresses. As always feel free to reach out to a member of the ZEGA team with any questions.

Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Iron Condor
  • Short call strike: 5100
  • Long call strike: 5150
  • Short put strike: 4225
  • Long put strike: 4175
  • Call Spread Risk (prob. ITM): ~ 2% at time of entry
  • Put Spread Risk (prob. ITM): ~ 1% at time of entry
  • Targeted total return: ~1.2% 
  • Distance Put Strike OTM: ~11.5% at time of entry
  • Distance Call Strike OTM: ~6.8% at time of entry
  • Expiration: February 9th, or 21 trading days until expiration