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HiPOS Update: The Trade to Set Up the Next Trade

Calculus Behind the HiPOS Conservative Adjustments

Today ZEGA’s traders rolled the remaining short call spread out a few weeks and up to a higher strike.

This move is on the heels of closing out the short put spread earlier that had made up the other piece of the overall short iron condor position. The entire trade had been put on for a credit while the cost to close out those two pieces was minimal and still resulted in a realized profit. The reason to roll the call side now was more opportunistic while also sharing the benefit of moving further out of the money for the short call side.

This also sets up the next opportunity to add a short put spread to create a new iron condor, joining the new and current short call spread.

The other reason to move now instead of waiting until expiration is that with such a short time left until expiration on August 19th, moving to September 16th means it is much easier to add the put side with a longer runway on the calendar.

Otherwise, it was less likely even if markets sold off to find positions that qualify under our strict rules for entry given, they likely would not give us the requisite return compared to the premium required for the risk.

The way to think about this move is we paid a small debit to close the position early and now have a short new call spread on.

Updating Our HiPOS Graph

Above we can see our normal graph which shows the price chart of the S&P 500 Index (SPX), the vertical blue line marking the expiration date, and the horizontal orange line above the market representing the 4700 short call strike level.

With the roll we reset the purple curved line on the graph. This is where ZEGA’s traders may decide to adopt a more defensive posture should price move above. The more time that passes towards September 16th’s expiration day, the more room the position has to breath. This is a reflection of the positive effects of time decay kicking in.

If we were to add a short put spread, creating the short iron condor, you’d also see another purple curved line below.

For now, you are rooting for the market to go lower.

First, it would be positive for the existing position, but secondly it would provide better opportunities to leg into the other side of the trade (puts) thus increasing our target profit.

So, we’ll leave it there for now but be back with updates in the coming weeks.

 Now for the Particulars: (Updates Bolded)

  • Index: S&P 500 Index
  • Position type: Short Call Spread
  • Short call strike: 4650
  • Long call strike: 4700
  • Call Spread Risk (prob. ITM): ~2.5% at time of entry
  • Targeted total return: ~2%
  • Distance Put Strike OTM: ≈9.7% at time of entry
  • Expiration: September 16th, or 25 trading days until expiration