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HIPOS Weekly Update: New Trade

By Derek Moore

In the wake of our last trade which expired at a full profit on Friday, today the ZEGA trading team was back to work looking for a new position that satisfied our stringent rules for entry.  This time, we found a February 22nd expiration short put spread with expiration of 2460 and 2410 on the S&P 500 Index.

The short side of the trade is located at the 2460 strike or a little over 9.5% out of the money. Some of you might recognize that February 22nd is only 18 calendar days (13 trading days) until the expiration. This includes the Presidents day holiday when there is no trading. With volatility levels closer to historical normalized rates at this time, we have been able to find positions which still qualify under our rules for entry.

We went forward with the trade as all of our entry rules were met; which include probabilities, days to expiration, distance out-of-the-money, and potential profit target. We did exercise some discretion and chose the SPX 500 Index as the underlying vs. the Russell 2000 Index or the Nasdaq 100 Index. This was done in an effort to be a bit more conservative given the least historically volatile index was available for a position.

Going forward you and your clients will be rooting for the S&P 500 Index to stay above the purple defensive posture line as well as the short put strike. One thing to point out, in case you are new to our HIPOS strategy, is that the closer a position gets to expiration day, the more room it has to breathe for lack of a better phrase.

You can see in our graph above that the purple line slopes downward and to the right until it meets with its expiration day. The reason why this happens is due to the benefit of time decay on our spreads. If a trade reaches expiration and expires worthless we can realize a full target profit.

We will continue to update this position as we normally do.

Now for the Particulars:

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 2460
  • Long strike: 2410
  • Risk (prob. ITM): 1% at time of entry
  • Targeted return: 0.90%
  • Distance OTM: 9.5% at time of entry
  • Expiration: Feb 22nd, 2019 or 18 calendar days to expiration at time of entry

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