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HiPOS Weekly Update: Duel Strategy Update

HiPOS (High Probability Options Strategy) S&P 500/SPX Volatility

By Derek Moore

HiPOS Conservative Holding Steady

This week we will give an update on both HiPOS Conservative as well as the HiPOS Aggressive Strategy. The corresponding graphs will be above each section. As you can see we have the normal chart above for the conservative version,  where we can see that with 9 calendar days left until expiration day, the market is bending a bit with this latest drawdown, but the value of the spread is still below our cost basis.

This is good since as sellers of premium, we want the value to eventually go to zero and expire worthless. Despite the pullback the short 2700 put strike remains around 16% out of the money. Meaning the distance between where the S&P 500 Index currently sits and the short leg of the spread. The market also continues to rest above the purple curved line where our traders may employ a more defensive posture.

With expiration day next Friday, you want to see time tick by. After this weekend, you will only have 5 trading days left to expiration. One of the reasons why this latest market pullback has not affected the HiPOS position much is that the move happened closer (with less time) to an expiration. Plus, the distance out of the money remains comfortable.

HiPOS Conservative is designed to have enough room between the market and the short position at entry to reduce the probability of going in the money. Plus, we require enough premium to compensate for the risk taken.  This trade also is a good example of higher volatility allowing for us to capture premium with a shorter time to expiry.

Now for the HiPOS Conservative Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread 
  • Short put strike: 2700
  • Long put strike: 2650
  • Risk (prob. ITM):  <1% at time of entry
  • Targeted return: ~ 0.95%
  • Put Spread Distance OTM: ~ 16.5% at time of entry
  • Expiration: October 2nd or 7 trading days to expiration


HiPOS Aggressive: “Do Your Job”


As we have begun to include the HiPOS Aggressive Strategy in updates, this marks the first regular weekly one that we will offer. While the market has pulled back towards the short NDX put spread causing the distance between the underlying instrument (Nasdaq 100 Index) and the short put strike to narrow, time decay has allowed this portion to remain in an unrealized profit.

Expiration day on this one takes place Friday at the close, so you really get the acceleration of that remaining time value. As we mentioned in the introductory article to HiPOS Aggressive, typically we will be short a credit spread on one index and long a credit spread in another one as a hedge.

To quote the assured first ballot Hall of Fame Patriots football coach Bill Belichick, “Do Your Job”.   This is exactly what the long S&P 500 Index put spread has done.  A few sessions ago this portion more than offset the drawdown in the NDX since the two indexes closed their divergence gap. Today the net of both positions is an unrealized full profit. In other words, there is still premium left on the short NDX position, but equal amount left on the SPX position.

Without getting too technical, we would still have to pay a debit to close out the short spread but collect a credit on the long spread. Some might ask why we do not just close out early? Well those figures are what the quotes indicate. The reality in trading a cross-exchange strategy is that executable trading prices may be different. This is part of the benefit of our trader’s vast experience working these types of orders.

So, what to expect until expiration afternoon Friday? You may see the trades just run their course and both expire worthless. This is how the positions are designed with a target profit in mind. If beneficial to your clients, our traders may employ a few tactical moves to potentially increase the returns. Of course should a negative re-divergence occur in addition to adverse market moves, we would look to take additional risk mitigation steps.

We know that the inclusion of the HiPOS Aggressive is new so I would encourage those who have not read last week’s piece which detailed the strategy to check that out. This is meant as an update and not an education piece that we previously released. As these are new, we also would welcome feedback from advisors utilizing this version of the strategy as to what to include each week.

So with that, we will be back next week with another update.