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HiPOS Trade Update: Short Term Volatility Spike

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

Yesterday ZEGA’s traders capitalized on the resulting short-term rise in volatility due to Tuesday’s downturn.

For this edition a short put credit spread with 21 trading days to go until March 15th expiration was chosen as it met all our strict rules for entry. One of the benefits of HiPOS is the ability to wait for more opportune times for entry. While we’ve only been in cash for all of 1 full day after Friday’s successful expiration at full profit, patience meant getting a better entry point.

As sellers of premium, we want time decay to work for us and that includes weekends and holidays which we have (Presidents Day) on Monday.

Reviewing Our HiPOS Graph Above

This will be a little easier to follow compared to the last trade which had both a short call spread and a short put spread on each side.

The S&P 500 Index (the underlying) is represented in the price chart. The short strike of 4425 is shown via the dotted orange horizontal line. You’ll notice the distance between the price of the market and the short strike which measures about 11%.

The 11% is the amount out-of-the-money (OTM).

Then we have our typical purple curved line which represents area should price fall below, ZEGA’s traders may take a more defensive posture to further manage risk in the strategy.

That line moves down and to the right as time goes by. This is because every day that passes you see more and more time premium decay, and the probability of the market reaching the 4425 short put strike also declines. We like to say early in the trade the underlying (S&P 500 Index) has less room to breathe but that expands as we move towards expiration day.

Expiration day March 15th is shown in the vertical dotted blue line.

What Are You Rooting For?

As I said it is a little easier to follow as you want the market to go up.

Up, sideways, or down so long as it doesn’t more too far too fast down towards the short put strike in the spread. The larger the distance OTM between the S&P 500 Index and 4425 level the better. You don’t necessarily need the market to go up to potentially realize a profit in HiPOS. Since lower volatility will soften premium levels, you want volatility to drop.

As always you want the calendar to move forward so the benefit of time decay starts to kick in.

Alright, we’ll leave it there but as always feel free to reach out to ZEGA with any questions.

Now for the Particulars: 

  • Index: S&P 500 Index
  • Short Credit Spread
  • Short put strike: 4425
  • Long put strike: 3775
  • Put Spread Risk (prob. ITM): ~ 1% at time of entry
  • Targeted total return: ~1% 
  • Distance Put Strike OTM: ~11% at time of entry
  • Expiration: March 15th, or 21 trading days until expiration