By Derek Moore
In day two of this selloff in markets, volatility surged giving us an opportunity to add a short put spread to our existing short call spread trade in our primary HiPOS Conservative Strategy. Those who have been in the strategy will recognize this total position as a short iron condor trade. Simply, we are short a put spread and call spread at the same time with the same expiration.
This new trade added another potential .9% return to accounts by the existing expiration of September 18th. Since the initial trade had a profit target of 1.7%, this now lifts the total potential profit to 2.6%. With the volatility expansion, we found this new 2800/2750 short put trade in the S&P 500 Index 17-18% out of the money despite only have two calendar weeks to go to expiration.
If you have been rooting for the market to drop due to the initial short call spread, you’ll have to rebalance your thinking where you really just want the market to hang around here for the next two weeks. Of course, HiPOS can handle moves up or down, provided they are not too fast and two soon in the trade. You also would like to see volatility go lower as option premiums are pumped up a bit right now.
You can refer to the typical HiPOS graph above where you now see both the call and put sides reflected.
Before the particulars below, a quick mention that Monday is Labor Day and the markets will be closed. This means when the market opens back up Tuesday, we will have three non-trading days pass and only 9 more trading days until expiration.
Now for the Particulars:
- Index: S&P 500 Index
- Position type: Short Vertical Call Spread
- Short call strike:3750
- Long call strike: 3800
- Short put strike: 2800
- Long put strike: 2750
- Risk (prob. ITM): .9% at time of entry
- Total Targeted return: ~ 2.6%
- Call Spread Distance OTM: ~ 6.8% at time of entry
- Put Spread Distance OTM: ~ 18% at time of entry
- Expiration: September 18th or 9 trading days to expiration