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HiPOS Trade Update: On the Call Side

Buy & Hedge Hedging HiPOS (High Probability Options Strategy) Interest Rates Option Trading S&P 500/SPX Technical Analysis VIX Volatility

By Derek Moore

New HiPOS Conservative Trade Details

The ZEGA trading team found a new short call spread to put on this morning in the HiPOS conservative accounts.

You may notice that the position was established on half the account. Another tranche may be put on subsequently as well as the potential to add a short put spread. Establishing a half position is something ZEGA does from time to time negotiating the various volatility opportunities. This iteration used the 4850 by 4900 strike prices with an expiration date of December 22nd. The distance OTM (out-of-the-money) at time of entry was around 7%.

This trade does have the Thanksgiving holiday as well as a half day trading session this Friday, so all told its 20.5 trading days until expiration after the close today.

Reviewing The HiPOS Graph

You can see the graph above looking a little different as you might be used to seeing the purple curved line and short leg strike below the market instead of on top.

Since it’s a short call spread, everything is flipped. The distance OTM is measured by the current S&P 500 index price against that 4850 short call strike price. The general principles the graph outlines are similar where the purple curved line moves further up and to the right with each day that passes towards the Dec 22nd expiration.

For anyone new to the strategy, this line represents an area should price go above, we may take a more defensive posture to further manage risk.

As positive time decay starts to erode that portion of the options price, the trade has more and more room to breathe.

What Are You Rooting For?

Well, ideally the market stays sideways or moves lower for a bit.

It can move higher against our position so long as it doesn’t move up too far too fast, which would cause the value of the spreads we sold to increase. As net sellers of option premium, we want to generate a credit and have it eventually expire at zero to realize a full profit.

I hinted at it earlier but with this position in addition to adding a second half tranche on the call side, we may have an opportunity to leg into a short put spread as well. If you are rooting for this then you’d like to see the market experience a short-term increase in volatility while moving lower.

One thing that is a little different on the call side of a HiPOS trade is how volatility changes and affects the positions.

When we sell short put spreads, typically if markets are moving sharply lower against the trade, we see an increase in implied volatility (IV). This also means premiums can be increased due to higher IV and works against us.

While IV can move higher while a market moves higher, typically you don’t see a volatility surge along with a market surge higher. It works a little differently on the call side. Without getting too technical just understand that when selling premium, in addition to the S&P 500 Index price doing what you want, volatility dropping is a positive once you’ve put on a new position.

As always, if we make some additional adjustments, we’ll be back here to update everyone.

Do reach out to a member of the ZEGA team with any questions and beyond that we hope everyone has a great Thanksgiving!

Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Call Spread
  • Short call strike: 4850
  • Long call strike: 4900
  • Call Spread Risk (prob. ITM): < 2% at time of entry
  • Targeted total return: ~1% ( Since a half position 0.5% Total Return)
  • Distance Put Strike OTM: ~7% at time of entry
  • Expiration: December 22nd , or 20.5 trading days until expiration