By Derek Moore
Elevated Volatility Provides Deeper Out of the Money Short Put Strike
Today, ZEGA’s traders were able to take advantage of heightened volatility in the markets right after Friday’s successful expiration at full profit.
When volatility is higher, we can get to achieve our target premium further away from the current price of the underlying index. At the time of entry, the distance out of the money was around 21%. This trade also only has 16 trading days remaining until expiration.
Both the shorter time to expire and distance are features of a higher volatility regime.
Explaining Our Typical HiPOS Conservative Graph
Above we see the graph which highlights the short 3550 S&P 500 Index put strike below the market dotted line in orange
We also have our typical purple defensive posture curve which highlights areas our traders may take additional risk mitigation measures should price close below. You’ll notice that once more time passes, the curve quickly trails lower and to the right providing more breathing room for the position.
Even if the S&P 500 moved lower in the next few days, we have rules in place to let the trade settle down and season a bit.
What Are You Rooting for In the Trade?
Simply price to move up, stay where it is, or just not substantially drop lower early in the trade.
One of the benefits of HiPOS Conservative is that you do not need price to move higher to potentially profit from trades. HiPOS is about benefiting by selling volatility and then watching time decay kick in. With this trade you want the calendar to advance.
Do keep an eye on the calendar to make sure to secure holiday presents in time though!
Will You Add a Short Call Spread (Creating an Iron Condor)?
ZEGA’s trading team is always looking at both the short put and short call side of potential HiPOS trades.
If one were to meet our strict criteria for entry, we could add that short call layer on. One thing to keep in mind is there typically is less robust premium on the call side which makes them more difficult to qualify. With only 16 trading days, our ability to get far enough away from the current index starts to make it less probable as we move along.
As always, we of course will update everyone should that opportunity present itself.
With that we’ll end this week’s update. If you have any questions don’t hesitate to contact ZEGA with questions.
Now for the Particulars
- Index: S&P 500 Index
- Position type: Short Vertical Put Spread
- Short strike: 3550
- Long strike: 3500
- Risk (prob. ITM): <1% at time of entry
- Targeted return: ~ 0.92%
- Distance OTM: ~21% at time of entry
- Expiration: December 29th or 16 trading days until expiration