By Derek Moore
February 17, 2023
New HiPOS Conservative Trade Today
Today ZEGA’s traders identified a new short put spread position going out to March 17th expiration.
You’ll notice above that markets gaped lower a bit combined with a higher short-term volatility jump. Typically, we try to be patient and remain in cash for a bit before the markets give us better risk metrics. When markets gap lower, with higher volatility, it lets us put on a short put spread with a strike price further out of the money with the appropriate premium received.
More simply said, we get more juice from the same squeeze that was present prior to today.Our HiPOS Graph Explained
Above you see a chart of the S&P 500 Index (SPX) showing today’s gap lower.
As an aside, it uses candlestick charts. When you see a red candle that is filled in solid, it means the closing price was lower than the opening price. Green candles with an opening in the middle (body) show when closing prices are higher than the open price. The poles above and below that body section are the high price and low price of that period.
As of when we grabbed that graph, markets were near the lows of the day.
The vertical dotted line shows the March 17th expiration day.
That is 19 trading days away from entry. The horizontal dotted line illustrates the short 3400 strike in the put spread we sold. As of the entry, it sits 16.1% lower (out-of-the-money) from the current price. The higher the implied volatility we referenced earlier, the further away we can sell spreads from the current price and still get our required target return.
The target profit is about 1% on this trade.
Then we come to our purple curved line.
This represents areas where should price fall below, ZEGA’s traders may take a more defensive posture. You’ll notice that once you get past the first part of the trade, the line slopes down and to the right reflecting the changing probabilities and erosion of premium via time decay.
Each week we’ll continue to post an updated graph on this position.
What Are You Rooting For?
Since this is a short put spread, ideally markets trade sideways or up.
The good thing is that with HIPOS, even if markets move lower, as long as they don’t move too far down too soon, that direction can be fine as well. Since HIPOS benefits from time decay, you want the calendar to tick by so more “time premium” erodes from the value of the spreads. Since we sell premium, we eventually want the value to decay to zero to realize a full profit.
Below we’ll list the particulars of the trade and will plan weekly updates as we progress forward.
Now for the Particulars:
- Index: S&P 500 Index
- Position type: Short Put Spread
- Short put strike: 3400
- Long put strike: 3350
- Put Spread Risk (prob. ITM): < 1% at time of entry
- Targeted total return: ~1%
- Distance Put Strike OTM: ~16.1% at time of entry
- Expiration: March 17th, or 19trading days until expiration