HiPOS Trade Update: New HiPOS Conservative Trade Update
By Derek Moore
New HiPOS Conservative Trade Update
Today ZEGA’s traders simultaneously closed out the existing trade that had almost nothing left (meaning almost full profit realized) in it and opened a new short put spread with a November 22nd expiration date.
We always mention that typically we’ll let trades expire worthless, unless there is something to roll into that makes sense for clients. With only a mere 3 days remaining until expiration, all but some residual time value was out of the spread and given this new trade met our strict rules for entry, it made sense to roll early.
For this one we utilized the November 22nd expiration date.
The distance out-of-the-money (OTM) at entry was around 14.4%.
Reviewing the HiPOS Graph
Above we can see that distance between the current price of the underlying S&P 500 Index and the short put leg in the spread of 5000 noted by the dotted papaya line representing the 14.4% OTM amount at entry.
The expiration date is represented by the vertical dotted blue line. The pink ZEGA Risk Curve slopes down and to the right. This tracks how as the trade gets closer and closer to expiration, the probability of a market getting below your short put spread strike lessons.
Think of that line as areas where the market moving below may result in ZEGA taking a more defensive posture to further manage risk.
Just looking at the line, you start to understand that there is less breathing room early in the trade and more as the trade moves along.
What Are You Rooting For?
Since this is a short put spread below the market, first and foremost you’d like the market to move higher from here.
This would increase that OTM percentage. It’s also fine if the market moves sideways, or down. What you don’t want is for a market to move down sharply, especially early on with more time to expiration. We touched on that pink risk curve in the section above, but just understand that as time goes by, that time decay kicks in and there is more room for the market to oscillate.
The other thing you are rooting for is volatility to drop.
As of the close today the VIX Index measured 18.20.
While not significantly higher than normal, there is still a healthy amount of volatility in markets. This is part of the reason why we were able to find a grade with the distance OTM that qualified while still bringing in the required potential profit target.
We will be following up with some updates as the trade progresses, but for now we’ll leave it there.
Remember you can go to our website to find out more about the benefits and risks of the HiPOS strategy here: https://zegainvestments.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: ~1.1%
- Distance Put Strike OTM: ~14.4% at time of entry
- Expiration: November 22nd, or 23 trading days until expiration