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HiPOS Trade Update: Explaining the New HiPOS Trade Position

By Derek Moore

New HiPOS Conservative Trade

On Thursday May 23rd, the ZEGA trading team executed a new short put spread on the underlying S&P 500 Index (SPX).

This vintage utilized a short 4650/4600 put spread about 11.7% out-of-the-money (OTM). The expiration date goes out to June 28th which is 25 trading days with the Memorial Day holiday baked in there. Below we’ll get into the details on the HiPOS graph, but you’ll notice that the trade was done alongside the sharp reversal down day Thursday as volatility rose. Often when initiating the put side of a short spread it corresponds to a retracement in markets with a volatility bump.

Existing HiPOS users know that we’ve been waiting since the last successful expiration for a trade to qualify based on ZEGA’s stringent rules for entry.

The HiPOS Graph

Above we see the underlying SPX Index, the 4650 short leg (dotted orange horizontal line) of the put spread, the normal purple risk curve, and the expiration date (vertical dotted line).

The distance between the SPX price and the 4650 strike is the OTM distance. The purple curved line represents areas where if price should close below it, ZEGA’s traders may take a more defensive posture to further manage risk. That line goes down and to the right as time ticks by. It also illustrates the benefit of time decay and decreasing probabilities of markets getting to that short strike price.

I’ll also note that the short strike level is further below the lowest low on the price chart which many technical analysts would identify as a support area for the SPX.

What Are You Rooting For?

You want the market to go higher, hang right around here, or it can go lower so long as it doesn’t go down too far too fast.

One of the benefits of a short volatility trade is taking advantage of time decay. As each day passes, more and more of that time premium melts off. The idea is to take in a net premium and then eventually have it melt down to zero and expire worthless   to realize a full profit.

The other thing you want is for volatility to subside.

Volatility is a major component in the pricing of options and a general rule of thumb is the higher the implied volatility, the higher the option premium derived from that specific component.

We’ll continue to update each week the trade as we go along but we’ll call it there and hope every one has (or had if your ready this next week) a good holiday!

Now for the Particulars: 

  • Index: S&P 500 Index
  • Short Credit Spread
  • Short put strike: 4650
  • Long put strike: 4600
  • Put Spread Risk (prob. ITM): ~ 1% at time of entry
  • Targeted total return: ~1% 
  • Distance Put Strike OTM: ~11.7% at time of entry
  • Expiration: June 28th, or 25 trading days until expiration