HiPOS Trade Update: Let’s Get Rolling!
By Derek Moore
New HiPOS Conservative Trade (an opportunistic early roll)
Well, didn’t I tell you IF we found another trade that qualified and made sense we’d roll early?
Yup, that’s what happened. Yesterday the ZEGA team ran the numbers and made the move to simultaneously close out the previous trade and open a new short put spread below the market. This new one expires October 25th and has 23 trading days left until that date. At the time of entry, the short put leg in the spread resided about 12.3% below the market (S&P 500 Index or SPX).
Also referred to as the distance out-of-the-money (OTM).
Reviewing the HiPOS Graph
Above we have the short 5025 put strike pointed to with the horizontal dotted papaya line.
The OTM distance can be seen in the space between the SPX price and that line. The vertical blue dotted line is the October 25th expiration date, while the ZEGA Risk Curve in pink illustrates areas should the SPX fall below, we may take a defensive posture to further manage risk.
That curved line slopes down and to the right as the days tick by in the trade which is indicative of the natural positive time decay and lowered probabilities of a market getting to the short strike.
What Are You Rooting For?
Anytime a new trade is on, you want the early period to be rather uneventful.
Said another way, you want the market to trend sideways or move higher in the early days. The reason why is as evidenced by the sloping ZEGA Risk Curve. As time goes by, the trade has more room to breathe so to speak. In general, you want the market to stay as far above that pink line and the short a strike as possible.
Now the market can go up, down, or sideways and still potentially result in a profit so long as it doesn’t move too far too fast towards that short 5025 area.
Since we are net sellers of volatility premium, you are rooting for implied volatility to stick around where it is now or even move lower which would be a positive.
To realize a full profit on this trade you need the premium on the spread to eventually decay to zero at expiration (unless we close and roll early like now to realize a profit).
Well that’s it for new but we’ll be back next week with an update.
If you are new to HiPOS or just want to brush up, head over to our website to review more information including the benefits, risks, and historical performance of the strategy: https://zegainvestments.com/products/hipos
Now for the Particulars:
- Index: S&P 500 Index
- Short Credit Spread
- Short put strike: 5025
- Long put strike: 5975
- Put Spread Risk (prob. ITM): ~ 1% at time of entry
- Targeted total return: ~1%
- Distance Put Strike OTM: ~12.3% at time of entry
- Expiration: October 25th, or 23 trading days until expiration