By Derek Moore
In a special Halloween HiPOS blog edition, we announce that ZEGA executed a new position consisting of a short put spread on the S&P 500 Index (SPX). The expiration date for this version will be Friday November 29th. In trading days that works out to 19 ½ days until expiration. You might be wondering what’s going on with the half day, right? While there are 29 more calendar days left, between all the weekends, Thanksgiving, and the half day on the Friday after Thanksgiving actual trading days get paired back a bit. Remember time decay works in our favor so the less trading days the more the time decay component of the spread premium erodes each trading day.
Some other aspects of this trade include the 2,700 level for the short side of the put spread which is around 11.1% out of the money. You’ll notice on the graph above, 2,700 is below the old lows from June. While we do not trade based upon market direction or sentiment, an old support area can be a stopping point or floor for a market.
The trade has a target profit of a little less than 1%. Some of you might notice this trade is on the longer side from a time perspective versus the more recent iterations. The majority of the reason for this is tied to our internal calculations. But another aspect is that with a longer duration it creates several pockets to insert a corresponding short call spread trade above the market should it qualify. If that trade would appear, for it to quality we must have the same expiration day for the call spread, the two trades together in the same account would create an Iron Condor.
Since we have new participants in the HIPOS strategy all the time, a few helpful hints on the graph above. The dotted blue vertical line represents expiration day. The purple curved line drawn adjacent to the end of the S&P 500 chart represents areas at which the ZEGA trading team will potentially take a more defensive posture to further manage risk.
The further a trade goes in time, the more room it has to breathe. You can see how the line curves down and to the right. The horizontal dotted orange line represents the short strike side of the put spread below the market. If you are rooting from home, you want days to pass and the market to remain where it is, go up, or simply not go down to fast and far. One of the benefits of this trade is that it does not rely on market direction entirely for its success.
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: ~11% at time of entry
- Expiration: November 29th or 19.5 trading days