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HiPOS Trade Update: Rolling Early to Reduce Risk & Increase Target Return

New Trade Explained

Today ZEGA’s traders executed a roll forward trade buying to close the existing short put spreads and simultaneously selling to open a new short put spread.

We stayed within the Nasdaq 100 index (NDX) but moved the expiration out from May 6th to May 27th. In doing so we took in an additional 1% in premium in exchange for adding an additional 20 trading days until expiration. At the same time, we moved to a greater distance between the current NDX price level and our short 10300 strike price. At entry, that distance is over 21% out of the money. 

Understanding the total 2% Target Profit Remaining

Below in the particulars you’ll see I’ve updated the language to reflect a “total” 2% target profit.  Above I said we got an additional 1% credit so what’s the deal? Because the market value of the spread was a little above the credit we received on the prior trade, we are taking the new 1% in addition to the remaining credit left to decay in the old one. If at expiration the new trade expires worthless, we will have realized that total 2% plus target.

Put another way, we put on the next trade a bit early due to the increased volatility.

Reading Our Typical HiPOS Graph

As you can see above, the graph has the price chart of the NDX, the expiration date of May 27th in a dotted vertical line, and the short strike price in the horizontal dotted line.

The purple curved line represents where our traders may take a more defensive posture to further manage risk. As the trade marches toward expiration day, it drops down and to the right. As time decay kicks in, the trade has more room to breathe.

Time decay is a major benefit of short volatility selling

What are You Rooting For?

You want the price of the NDX to go sideways, up, or not go down too far too fast. 

You also would like volatility in option premiums to drop. Of course, time ticking by helps that time decay melt away. One way most monitor this is to follow the VIX Index to keep track of current volatility levels in the market. 

The VIX measures the S&P 500 Index while VXN measures the volatility in the Nasdaq 100 Index.

Well that’s it for now but we’ll be back over the coming weeks with updates as the trade moves along. 

Now for the Particulars:

  • Index: Nasdaq 100 Index
  • Position type: Short Vertical Put Spread
  • Short strike:10300
  • Long strike: 10200
  • Risk (prob. ITM): ~2% at time of entry