By Derek Moore
April 12, 2021
Today the ZEGA traders were back to work on HIPOS Conservative finding a short call spread that qualified under our rules. For this one we identified a short 4375/4425 level in the S&P 500 Index that expires on May 7th.
You might remember I mentioned last week to expect more trades in the typical 4 weeks till expiration mode. This one is exactly four weeks or 19 trading days until expiration after Monday’s close.
This week there is some math involved. What, no one said there would be math? Well, it’s not that we pick market direction on these HIPOS trades, but sometimes we can incorporate some historical context in where our strike prices lie.
Without divulging some of our internal rules, the short 4375 level would be greater than 9% above a recent high from last month. Our numbers show that only in 1997 did a market move over the next 30 days more than 9% higher after a higher high. Simplified, we watch when a market makes a new high. Then, we use historical data and probabilities to determine how much higher the next high can be within a certain time frame.
It’s worth saying it again; HIPOS is not a direction play. We are fine if the market goes sideways, down, or up in this case so long as the move is not too fast and too soon in the life of the position. You can see on our typical HIPOS graph above how the purple defensive posture curve moves higher and higher the longer the trade moves towards expiration day.
Now for the Particulars:
- Index: S&P 500 Index
- Position type: Short Call Spread
- Short call strike: 4375
- Long call strike: 4425
- Put Spread Risk (prob. ITM): < 2% at time of entry
- Targeted return: ~ 1.5%
- Call Spread Distance OTM: ~ 6% at time of entry
- Expiration: May 7th or 19 trading days to expiration