HiPOS Trade Update: Volatility Creates Early Opportunistic Roll
By Derek Moore
New HiPOS Conservative Trade Established
Today we took the opportunity provided by the market to close our existing open HiPOS position and establish a new one with a December 20th expiration date.
With the volatility pop at the market open, the new trade qualified under our strict rules for entry. Given the previous trade that was due to expire worthless Friday had made almost all its profit, we closed that out early to take the opportunity to capture additional premium. In between the close Tuesday and expiration there are 21.5 trading days.
This is due to the Thanksgiving holiday and the ½ day next Friday.
When the new trade was established, the 5100 short put leg strike in the spread sat about 13% out-of-the-money (OTM) which represents the distance between that strike and the S&P 500 Index.
Reviewing the HiPOS Graph
Above we have our typical illustration showing the chart of the S&P 500 Index, the horizonal dotted papaya line showing the short 5100 put level, the blue dotted vertical line representing the Dec 20th expiration day, and the pink ZEGA Risk Curve.
The distance on that graph from the current SPX price and the short spread leg of 5100 represents the OTM amount. The risk curve represents areas between now and expiration where if the SPX should fall below it, we may take a more defensive posture to further manage risk. We normally point out that the reason that line curves down and to the right is due to the positive time decay inherent in short volatility trades.
The probability of a current market getting to the 5100 level is determined by the current implied volatility, time to expiration, and the distance OTM.
As the days tick by, so long as markets don’t threaten the short put level, we’d expect that probability to decline.
What Are You Rooting For?
You want the markets to firm up here and either hang around these current levels a bit or move higher.
The good thing about HiPOS is historically it has offered a lower correlation to equity markets in that the SPX can go down, and you potentially can still realize a profit. What you don’t want is the market to move lower early in the trade and too sharply lower towards that 5100 level.
Ideally the market firms here and time ticks by so that positive time decay can do its thing.
You can check out our website https://zegainvestments.com/products/hipos to learn more about HiPOS, its risks, and benefits for yourself.
We’ll leave it there for now but as always reach out to a member of the ZEGA team with any questions.
Now for the Particulars:
- Index: S&P 500 Index
- Short Credit Spread
- Short put strike: 5100
- Long put strike: 5050
- Put Spread Risk (prob. ITM): <1% at time of entry
- Targeted total return: ~1%
- Distance Put Strike OTM: ~13% at time of entry
- Expiration: December 20th , or 21.5 trading days until expiration