HiPOS Update: Back into HiPOS With Short Call Spread
By Derek Moore
Today the ZEGA trading team re-entered the short volatility market with a 4-trading day short call spread on the 3000/3050 strikes for a credit of just under 1%. This is the April 15th expiration date. Before getting to the details and some color around why we got back in and why we were able to put on such a short-term trade, I wanted to give you the headline first.
Why now? We’ve said there were two things we were primarily watching before we re-entered a new HiPOS trade. First, an environment where the implied volatility (what’s expected) and the historical volatility (what the moves have actually been) were more in alignment. We’ve seen the market normalize and begin to price in the risk within options premiums.
The other factor was the closure due to social distancing of the open outcry trading pits at the CBOE in Chicago. This is where relationships matter. Over the years ZEGA’s traders have been working with floor traders and market makers to execute our substantial option contract orders. While the floor remains closed, we’ve found that the virtual floor environment is working better than expected.
Without going into too much detail, on this trade ZEGA was able to talk with our trading floor partners who helped to facilitate buyers and sellers coming together. While they might not be able to put the phone to their ear and yell into a crowd, they can call, ZOOM, Skype, or in other virtual ways find liquidity partners. They also are able to call other firms’ traders to gauge interest.
So back to this trade. Yes, that was not a misprint in that while many have been used to HIPOS trades being 3 or 4 weeks in duration, this one is only 4 trading days in duration. This includes the long 3-day Holiday weekend coming up. The reason for this is the heightened volatility environment which looks to price in expected standard deviation moves.
The other aspect of this trade is that we are utilizing short calls. Many long-term participants in HIPOS know that in most environments only the short put side generates enough premium to qualify under ZEGA’s strict trading rules.
While we don’t pick market direction or explicitly use technical or fundamental analysis when inputting these positions, our team has taken note of multiple overhead levels of prior resistance the market would need to break through to get back to old market highs.
So, for now what do you want to root for? Many of you have long hedged market positions in our other strategies so while you don’t want the market to move substantially lower, nor above 3000 in the S&P 500 Index in the next 4 trading days, sideways to up a little will work.
Now for the Particulars
- Index: S&P 500 Index
- Position type: Short Vertical Call Spread
- Short strike: 3000
- Long strike: 3050
- Risk (prob. ITM): <1% at time of entry
- Targeted return: 0.92%
- Distance OTM: ~9% at time of entry
- Expiration: April 15th or 4 trading days to expiration