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HIPOS Update: Volatility Lift Provides New Trade Opportunity

By Derek Moore

After a bit of a respite sitting in cash, the ZEGA traders uncovered a fresh new short put spread position in the HIPOS strategy. For this edition, the team utilized the Russell 2000 Index with a May 3rd expiration date.

The position was built with a fifty wide spread. More plainly, this represents the difference between the short and long strike prices. Speaking of strike prices, for this iteration we’ll be using the 1390/1340 levels. At the time of entry, the short strike was about 11.6% out of the money. You can see this on the graph above where the short strike price of 1390 compared to the current price of the Russell 2000 Index.

The May 3rd expiration day means that there are 24 calendar days until expiration. However, only 17 of those are trading days. This includes weekends and a market holiday on Good Friday. Short premium sellers look for premiums to erode due to time decay throughout the life of a trade.

This decay happens theoretically each day including weekends and holidays. As you are hunting for Easter eggs, remember your HIPOS position may be enjoying positive time decay.

A quick refresher on the graph. The expiration date is represented by the vertical dotted blue line. The purple curve illustrates areas the ZEGA team may take on more of a defensive posture. The further into the trade, the more room the underlying market can fluctuate as the line trends further away from the initial entry area.

Now for the particulars:

  • Index: Russell 2000 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 1390
  • Long strike: 1340
  • Risk (prob. ITM): <1% at time of entry
  • Targeted return: ~1.00%
  • Distance OTM: 11.6% at time of entry
  • Expiration: May 3rd  2019 (24 calendar days and 17 trading days to expiration)