HiPOS Weekly Update: Recovery Trade Doing Its Thing

By Derek Moore

HiPOS Conservative Trade Update

As of early afternoon Thursday, the S&P 500 Index (SPX) is showing strength as it tries to close the gap created by the move down on Monday and the previous Friday’s close.

As of this writing, the short leg of the short put credit spread is about 15% out-of-the-money (OTM). The trade turned positive on an unrealized basis and due to the volatility when we rolled to this new position, that 15% gap is a healthy distance away. After today’s close they’ll only be 11 trading days left until expiration.

As we covered in last week’s note, taking a small loss on the original trade and simultaneously moving to this one will allow for the potential to recover part of that loss.

This is the benefit of keeping losses small in a short volatility strategy.

Reviewing the HiPOS Graph

Above we can see our normal graph where that distance OTM can be clearly seen.

The ZEGA risk curved line represents an area where if price should move below, our traders may take a more defensive posture such as happened last week. The line looks a little more straight down than usual because volatility was so high when we put the trade on. Currently the SPX remains comfortably above both the short 4550 strike price and the risk curve.

We are getting into the final 2 weeks of the trade before the August 23rd expiration as evidenced by the vertical orange expiration day line.

What Are You Rooting For?

The obvious answer here is you want the market to continue higher.

This would give even more breathing room for trade but also, we’d expect volatility to subside further should markets continue a path higher as fears are assuaged a bit. It is also just fine if the market oscillates sideways or moves lower. What you don’t want is for the market to make a sharp move lower that sends it close to our risk curve discussed above.

As more time decay comes out of the trade, it helps increase the probabilities of it expiring worthless which is what you want.

Because volatility is higher now, what would be helpful for the open positions on an unrealized basis would be a drop in the implied volatility levels of the SPX.

This would reduce the corresponding option premiums on the position. We’ll end this one here but as always reach out to a member of the ZEGA team with any questions. You can also check out the presentation on our HiPOS strategy which outlines the benefits and risks. https://zegafinancial.com/products/hipos