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HiPOS Weekly Update: New Trade for the New Year!

By Derek Moore

January 7th, 2020

After running the analytics today, ZEGA’s traders found a new short put spread for our primary HiPOS Conservative strategy. This iteration will have a January 31st expiration which is 17 trading days away given weekends and the Martin Luther King Jr. holiday on Monday the 20th. The underlying index is once again the S&P 500 and the profit target is 1%.

The strikes chosen for the short put spread are 2880 for the short leg and 2830 for the long. If you look at our typical HiPOS trade graph above, we can go through some of the usual aspects of the trade. The short 2880 strike is about 11% below the current price of the S&P 500 Index. In other words, it is OTM (out of the money) by 11%.

For the technicians in the audience, you may also notice that the short strike happens to line up with some previous support area lows from September. While this isn’t a rule for entry, you can look at this as a further benefit as often support acts as a buffer to the downside.

For those new to the strategy, the graph also illustrates what we call the purple defensive posture line. This is the line where if price moves below it, ZEGA may take further defensive trading measures to mitigate risk.  The earlier on in a trade, the less room it theoretically has to breathe before touching the purple line. As time decays, a benefit for short volatility strategies, that margin eases through expiration.

Speaking of time and expirations, this trade is on the shorter side of our typical entries at 24 calendar days (17 trading days). Part of the benefit of a short-term spike in volatility is that we can find new trades that qualify from our rules, but also may enable us to shorten up the time exposure.

Moving forward let’s talk about what do you want to happen now. First, the trade benefits from the underlying index remaining at the level where it is, go up, or at least don’t go down too far too quickly. A huge benefit of HiPOS is that we don’t need the market to go one point higher to achieve your profit target.

Second, you will also be cheering the days ticking off the calendar towards expiration as each day that passed removes more and more time value. As short volatility sellers, we sell and look for the premium to eventually move to zero to realize our full profit. Off course sometimes we close out positions early to opportunistically take profits (as we did in December), or to mitigate risk. We will be back with an update should any of that occur.

For now, we’ll leave you with these details and include some additional below:

Now for the Particulars

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 2880
  • Long strike: 2830
  • Risk (prob. ITM): <1% at time of entry
  • Targeted return: 1.0%
  • Distance OTM: ~11% at time of entry
  • Expiration: January 31st or 24 calendar days (17 trading days)