What Action Did ZEGA Take Today on HiPOS Conservative?
Today the ZEGA team rolled forward and down (further out of the money) the primary HiPOS Conservative trade.
Even though the S&P 500 Index (SPX) was still above the short 3400 put strike, todays continued downward move in equities meant the price was too close given the time remaining until expiration. A roll involves simultaneously buying the existing spread to close and selling a new spread to open.
The new short strike is the 3000 put with a July 15th expiration date or 19 calendar days away.
The distance between the short strike and the SPX is roughly 18%.
By doing this roll to manage risk, the existing position that was closed out experienced just under a -6% realized loss while the new position has a target profit of about +2.6%. This roll was not due to a directional call but using our internal calculations.
Given that the previous trade had a June 30th expiration date, this only adds an additional 2 weeks.
Explaining the HiPOS Graph Above
Above you see our normal graph which includes the price of the SPX, expiration date vertical dotted line, the horizontal short put strike level, and our purple curved line.
This line represents areas should price close below it, we may take a more defensive posture. This roll is an example where price moves changed ZEGA’s posture considering how many days remaining till expiration. As we always point out, as time goes on, there is more room to breathe for trades as it trends down and to the right.
We’ll post updates each week with an updated look at the trade.
What Are You Rooting for Now?
While the SPX can move lower, so long as it doesn’t move too far too fast downward that’s ok, but ideally you want markets to firm here and move sideways for a bit or higher.
This would allow time decay to positively affect the position and lead to lower implied volatility. If volatility shrinks, option premiums will shrink. Volatility is a major component of option prices. You also want time to tick by, which would give some distance between our entry date and expiration.
We’ll continue to post updates weekly or ad-hoc if need be.
In the meantime, feel free to reach out to a member of the ZEGA team with questions.
Now for the Particulars:
- Index: S&P 500 Index
- Position type: Short Vertical Put Spread
- Short strike: 3000
- Long strike: 2550
- Risk (prob. ITM): ~3% at time of entry
- Days to Expiration: July 15th or 19 trading days