HIPOS Trade Update: New Trade Illustrates Effect of Higher Volatility at Entry

By Derek Moore

January 31, 2022

Today ZEGA Executed a Trade Taking Advantage of Higher Volatility

The opportunity was due to implied volatility levels remaining elevated after our last trade successfully expired at a full profit Friday. The volatility and higher premiums allowed us to sell a short put spread that brought in enough premium to meet our requisite target. We were able to get around 20% below the current market for the level of our short put strike of the spread.

So, what are things you need to know to help your clients understand the why and how the position makes money?

Does This Mean the ZEGA Team Is Calling a Near-Term Bottom?

No, HiPOS is a non-directional strategy that relies on ZEGA’s stringent rules for entry and the calculus to pinpoint market levels that give us the right combination of return vs risk.

We are not making directional bets on a market bounce. HiPOS can make money if the markets stay flat, go up, or go down. In this case we followed the rules but higher volatility, as mentioned above, means getting further away while maintaining our profit targets.

High volatility typically provided a more favorable entry for the strategy.

Explaining the Graph and What to Root For

Above, you can see the graph of the market along with both the expiration date of February 28th (vertical line) and short 3550 put strike.

You can also see the purple curved defensive posture line. This is the level should markets move below, our traders may take more defensive action on the positions. Notice how it continues to drop lower and to the right as we move towards expiration day. You and your clients are rooting for price not to go down too far too fast.

Earlier in the trade, the market has less room to maneuver and why from an unrealized profit and loss standpoint, has more pricing risk than later on.

Any Chance You Can Also Sell a Short Call Spread to Create an Iron Condor?

Yes, should the call side meet our stringent entry rules.

Because there is enough time to expiration, this is something the ZEGA trading team will be on the lookout for. This would provide an opportunity to add additional premium and thus potential profit to the existing trade. The closer we get to expiration, the less likely the opportunity develops.

Adding a call spread to the trade will need to see markets move higher in recovery while volatility remains elevated enough to keep premiums elevated.

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: ~1.4%
Distance OTM: ~20% at time of entry
Expiration: February 28th, or 19 trading days until expiration