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HiPOS Trade Update: Rare Down Day of Late Presents Entry Opportunity

By Derek Moore

New HiPOS Conservative Trade

With today’s gap lower in the S&P 500 Index and increase in implied volatility, ZEGA’s traders identified a new short put spread position to establish within HiPOS Conservative accounts.

This iteration uses the May 3rd expiration, 23 trading days away, and a short 4600 put strike which sits about 11.5% out-of-the-money (OTM). The target profit on this one is about 1%. Generally, we like to be patient until our strict rules for entry are met. Waiting for a day like this improves our probability of success.

This is a typical HiPOS trade as many long-time users of the strategy will recognize.

Reviewing The HiPOS Graph

Above is a price graph of the S&P 500 Index which is the underlying.

The short strike in the put spread is highlighted (4600) in a dotted orange horizontal line while the May 3rd expiration date is the vertical blue line. You’ll notice the difference between the price and the 4600 level is what is considered the distance OTM. Then we have the normal purple curved line.

This is the area should price move below, ZEGA’s traders may take a more defensive posture to further manage risk.

HiPOS trades look to take advantage of time decay and probabilities in the options market.

The purple curve slopes down and to the right. The more time that passes, the more room to breathe the underlying has. As volatility sellers, we want to take advantage of the time decay in premiums and want the premium in the spread to eventually expire worthless at zero.

Price, time, volatility, and interest rates all factor into how option prices are determined.

What You are Rooting For?

With selling a credit put spread, you want the market to move up, sideways, and even down is ok so long as it doesn’t move too far too fast towards that 4600 level.

You also want time to tick by. Each day that passes means less time to expiration. Think about option premium as melting ice cubes. The longer you hold one in your hand, the more it melts.

It’s the same type of idea with selling premium.

You want it to melt away.

The last thing I’ll mention is ideally volatility drops post entry.

The reason being higher implied volatility means higher options premiums while lower volatility means option premiums are lower. Since we sold volatility premium and want it eventually to go to zero at expiration, a reduction would reduce the unrealized price of the spread pre-expiration.

Lower volatility, price remaining nicely OTM, and time to tick by are good things for HiPOS.

We’ll end it there but as always if you have any questions reach out to a member of the ZEGA team.

Now for the Particulars: 

  • Index: S&P 500 Index
  • Short Credit Spread
  • Short put strike: 4600
  • Long put strike: 4550
  • Put Spread Risk (prob. ITM): ~ 1% at time of entry
  • Targeted total return: ~1% 
  • Distance Put Strike OTM: ~11.5% at time of entry
  • Expiration: May 3rd, or 23 trading days until expiration