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HiPOS Update 10/25/18: Rolling down and out

By Jay Pestrichelli

This  morning’s higher open afforded us the chance to do something we haven’t  done in a while; roll the position down (strike prices) and out (date  of expiration) for a net credit of 1.2%. What that means is we closed  the existing position and simultaneously entered a new trade.  The new  trade is farther out of the money (the down part with put spreads) and  has a new November 16th expiration that is three weeks longer (the out  part).

At a high level, this action can be explained as if we executed Monday’s trade after expiration two days early.

This  action did 3 things, two are conservative, and one creates more risk.   The additional risk – We added three more weeks of exposure in this  volatile market.   However, we were most likely going to execute a trade  anyway on Monday as mentioned above.  The conservative side of the new  trade is that we swapped out the risk of being within 3% of our exit to a  level of 11% out of the money.   We also generated another credit of  1.2% for a 3-week trade.

The details of the trade are as follows:

  • Index: Russell 2000
  • Position type: Vertical spread
  • Short strike: 1325
  • Long strike: 1275
  • Risk (prob. ITM): 3% at time of entry
  • Targeted return: 1.2%
  • Distance OTM: 11% at time of entry
  • Expiration: November 16th (A.M.) or 21 calendar days to expiration at time of entry