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HiPOS Trade Update: More Volatility Premium Harvested

By Derek Moore

New HiPOS Conservative Trade

With a continued higher volatility regime ZEGA’s traders were able to put money back to work finding a short put spread expiring December 2nd that qualified under our strict rules.

This position looks to capture a target profit of just under 1%. It’s worth noting once again, with higher volatility these trades have tended to be on the lower duration of a typical HiPOS position. There are only 15.5 trading days which account for both the Thanksgiving holiday and the half-day session that Friday. Sellers of volatility like the more rapid opportunity for time decay.

Separately, Thanksgiving may need a new marketing approach as Christmas music started after Halloween.

Starbucks already has its Christmas cups out but where are the Thanksgiving cups?

Reviewing Our HiPOS Graph Above

We have our dotted orange line representing the short 3200 put strike within the spread.

The vertical dotted line shows where December 2nd will lie on the calendar. Often we enter short put spreads around short term retracements in markets and you can see how price declined from its high from yesterday. The purple curved line represents where ZEGA’s traders may decide to take a more defensive posture should price pierce below. As time decay kicks in and the probability of reaching the short strike recedes, that line shifts down and to the right.

Think of this as the trade having more room to oscillate in price.

What Are You Rooting For?

Your wish list would include markets either moving higher or trading sideways to down.

Moving too far too fast would put positions under pressure. With higher volatility, should markets launch higher with continued volatility, there is always the possibility of adding a short call spread to increase the targeted return. We executed that tactic on the most recent HiPOS position that expired at a full profit last week.

You also want this higher volatility regime to continue as we look to take advantage of markets pricing implied volatility higher than resulting realized volatility.

Put another way, moves wind up being less than what the options market prices in and that’s a positive.

For now we’ll call it here but as always reach out to the team with any questions.

Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short call strike: 3200
  • Long call strike: 3150
  • Put Spread Risk (prob. ITM): < 1% at time of entry
  • Targeted total return: ~1%
  • Distance Put Strike OTM: ≈15.7% at time of entry
  • Expiration: December 2nd, or 15.5 trading days until expiration