HiPOS Trade Update: Going Back to the Short Put Side
New Trade: HiPOS Conservative Details
ZEGA’s traders found a short put credit spread that met all our strict rules for entry.
This one is a little on the shorter side with only 17 trading days left until the August 16th expiration. Part of the reason this trade was available was the recent uptick in implied volatility in the deeper out of the money (OTM) strikes. The target profit is just under 1%.
After the last trade that saw us put on a short call credit spread above the market, this iteration returns to the more familiar OTM put credit spread below the market.
At the time of entry, it was a little over 10% OTM which is the distance between the current market (S&P 500 Index) and the short 5000 put strike.
Reviewing the HiPOS Graph
Above is our usual graph which highlights the expiration date, the short 5000 put level in the horizonal blue line, and our ZEGA risk curve.
This curve represents areas should price fall below it, ZEGA’s traders may take a more defensive posture to further manage risk. That curve moves down and to the right the closer we get to the August 16th expiration line. This is due to the positive time decay and reduction in probabilities of the underlying market reaching the short put strike.
We always talk about how you want to see the market meander or move higher early in the trade to provide more breathing room.
What Are You Rooting For?
Along those lines, since this is a short put spread, you want markets to go up, sideways, or even down so long as it doesn’t move down too far too fast.
Ideally you want to see implied volatility move lower. The reason why is that as sellers of volatility premium, we want the value of the spreads to eventually melt away towards zero at expiration to realize a full profit. If volatility drops, the value of the spread may also drop. Of course, where the market is relative to the short strike is still a major factor.
Finally, you want the calendar to tick by as each day that passes sees additional time value get removed from the spread premium.
We’ll keep this trade update short and sweet but as always reach out to a member of the ZEGA team for more information on the strategy. You can also click here to learn more about the benefits and risks of HiPOS https://zegafinancial.com/products/hipos
Now for the Particulars:
- Index: S&P 500 Index
- Short Credit Spread
- Short put strike: 5000
- Long put strike: 4950
- Put Spread Risk (prob. ITM): ~ 1% at time of entry
- Targeted total return: ~0.9%
- Distance Put Strike OTM: ~10% at time of entry
- Expiration: August 16th, or 17 trading days until expiration