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HiPOS Update: The Wait for a New Trade is Over!

By Derek Moore

New HiPOS Trade

Today the ZEGA trading team identified a new primary conservative HiPOS trade. As we always point out, HiPOS will wait for a trade that meets our strict criteria before entering. This iteration is interesting in that the expiration of August 2nd is only 16 calendar days away and only 13 trading days away.

This would certainly represent a shorter than normal HiPOS trade. This opportunity came for two reasons. First, we did see a two-day pullback in markets but generally with an upcoming Fed meeting there is some extra implied volatility priced in already.

The position allows for a target capture of 0.90% over essentially two weeks and provides another opportunity, assuming successful expiration, to take advantage of any future volatility in markets. July 31st is when the next Fed announcement on any move (or no move) in interest rates.

Placing the trade at this point gives us some time decay and passage of time before that Fed meeting. While we enter HiPOS trades based on rules and not trying to guess interest rate decisions, it is an ancillary consideration around the strategy and timing.

Quickly to review the graph. We can see the expiration date of August 2nd marked with the vertical line. The short strike area of 2700 and then our purple risk line. This line represents areas where the ZEGA traders may take more defensive postures to further manage risk. The further along towards expiration date, the more wiggle room the position has.

Why in Cash So Long Prior to this Trade?

Since the beginning of 2019, we’ve had good conditions to move into a new HiPOS trade quickly after a previous successful expiration.   However, over the past 4-5 weeks, conditions have not been present that allowed for our rules of entry.  For those of you putting new money to work in HiPOS, it probably means you have been waiting several weeks.

Typically, over a given year the strategy remains ready and waiting in cash for over 100 days. So, this is typical based on our experience in the strategy. In fact, back in December 2016, most every account in the HiPOS strategy was in cash nearly 6 weeks.

HiPOS is all about watching and waiting for conditions that present a trade that meets our parameters. One that provides the right risk adjusted returns given current volatility and probabilities of expiring at a full profit. Unlike some strategies which always must be in the market, HiPOS can be nimbler and adjust to conditions.

The goal is to put you and your clients in the best possible trades for success. Forcing a trade is not something that the ZEGA team wants to do. Instead, typically we wait for a short-term spike in volatility to pounce on, but in this case, the build up of implied volatility in advance of the Fed announcement provided enough juice to make the proverbial squeeze.

Now for the Particulars

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 2700
  • Long strike: 2650
  • Risk (prob. ITM): <1% at time of entry
  • Targeted return: 0.9%
  • Distance OTM: 10% at time of entry
  • Expiration: August 2nd or 16 calendar days (13 trading days)