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HiPOS Update: New Trade - May 2020

By Derek Moore 

After a 9-day hiatus of patiently waiting in cash, ZEGA’s trading team was back at it finding a new HiPOS Conservative short put spread trade. This trade qualified under out strict rules after yesterday’s sharp end of day retracement and lower opening this morning. This iteration is again on the shorter end to expiration with 16 calendar days and only 11 trading days left. The relative shortness in duration of these trades reflects the still heightened level of implied volatility in the markets.  It’s worth noting on the road to the May 29th expiration we do have the Memorial Day holiday in there when the markets will be closed.

Keeping with the theme of continued higher volatility, this short-put spread was 22% out of the money at the time of entry. You can see above on our normal chart the short strike level of 2225. One quick insight from the ZEGA team is that just a few days ago premium was not available that far away from the current S&P 500 Index level.

Another interesting point recognized by long-time observers of the HiPOS strategy, is how far the short strike lies below the purple curve. The reason for this is that the HiPOS math reflects higher pending volatility than what the market’s probability calculus reflects. As a reminder, the purple line indicates the level at which ZEGA’s team will consider taking a more defensive posture. In this case, however, because we were able to get farther away from the market than usual, expect a clear and confirmed violation of the curve before expecting any action.

As you and your clients monitor the position you will want to root for the market not to move too far and too fast downward. Sideways works just fine as does a meandering march higher. Time decay given the short duration of the trade will, start to work for your clients a little sooner as well. As volatility premium sellers, time decay is a positive aspect of the strategy.


Now for the Particulars

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short put strike: 2225
  • Long put strike: 1975
  • Risk (prob. ITM): <1% at time of entry
  • Targeted total return: ~ 1%
  • Put Spread Distance OTM: ~ 22% at time of entry
  • Expiration: May 29th or 11 trading days to expiration