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HiPOS Trade Update: Short Call Spread Above the Market

By Derek Moore

New HiPOS Conservative Trade

Monday ZEGA’s traders were able to find a short call spread above the market to enter.

Typically, many of you are used to seeing us put on a short put spread below the market. We look at both sides to see if either or both qualify. Often it is only the put side that qualifies but given the market dynamics we were able to find a trade where the short leg is about 7% out-of-the-money (OTM) for just under 1% above the current S&P 500 Index price.

While the expiration date is July 19th, with all the holidays and weekends it amounts to only 22 trading days until that expiration cycle.

It’s worth noting that there is still the opportunity to add a short put spread below the market should the opportunity arise.

Reviewing the Graph

Above is our normal HiPOS graph where you see the price chart of the underlying asset the S&P 500 Index (SPX).

Then since this is a short call spread above the market, it is flipped. The short call strike in the spread is marked by the red dotted line up top. The ZEGA risk curve is above the market and moves up and to the right. This is an area where should price cross above, ZEGA’s traders make take a more defensive posture to further manage risk.

The July 19th expiration date is pointed to and runs vertical.

What You Are Rooting For

It’s a little bit different in that you want the market to go down.

You’re also fine with some sideways action, or going up, just not too far up too early in the trade. I mentioned earlier the possibility of adding a short put spread at the same expiration to the current short call spread. This would form an Iron Condor. Ideally, you’d want the market to move lower, volatility shoot up, and to do so earlier in this trade.

If that happens there may be a chance to bring in additional premium or almost double dip.

Stay tuned on that but for now, since we are short call spreads above the market you want the SPX to stay a good distance below that 4850 strike area.

As always, you want the calendar to tick forward to start realizing the benefit of time decay and the reduction in the time value of the premium sold. This way the value of the spreads eventually declines to zero at expiration to potentially realize a full profit.

We’ll be back next week with updates. In the meantime, you can check out the ZEGA website for more information on the HiPOS Strategy.