HiPOS Weekly Update: Switching Sides

By Jay Pestrichelli

Today’s market declines were extreme. No other way to describe it. With both the futures and regular trading session limiting out and the curbs kicking in, we continue to adjust the HiPOS trade to the market conditions we’re presented.

The action today consisted of exiting the puts that we just rolled last week, as the markets gapped down and the result was the spread in the money. Simultaneously, we entered an iron condor that was out-of-the-money at the time of entry intended to cover the cost of the exit. For those unfamiliar, an iron condor is simply the name where we are simultaneously short a call spread and a short put spread at the same time on the S&P 500 Index.

The graph above shows a teal section with the desired target range for success between the strikes that expire on Friday.

This lowered risk in two ways: The first is that we went to the call side and based on where the short call spread is above the market, it represents the primary portion of the trade. That means that our bias has switched to a bearish one. So, if the selling continues, that leg of the condor will provide gains. The downside of this trade is it is susceptible to a swift rebound, something we saw multiple times last week. However, the advantage of selling calls is that when markets rise, typically volatility drops. So, we expect there to be a neutralizing effect for the first 4-5% of a rebound if we see markets move high enough to move past the short call strike.

The second way we reduced risk is we lowered the number of days that the trade will last. We took our expiration from March 20^th, which it was on Friday, to March 13, just 4 trading days away.

The next part of this adjustment was moving to a short put spread much lower and out of the money. The entry of the put side of the condor was about 12% OTM at the time of entry and added to help pay for the small debit the move made going from in-the-money on the puts, to out-of-the-money on the calls.

We’re still generating small cash amounts on each one of these rotations, so if the market can close between our strikes on Friday, account values will recuperate If conditions should warrant, we have a number of options to manage the trade further and will update everyone should that take place.

Trade Details:

Index: S&P 500 Index
Position type: Short Condor
Short Call Strike: 2850
Long Call Strike: 2900
Call Distance OTM: ~2% at time of entry
Short Put Strike: 2450
Long Put Strike: 2400
Call Distance OTM: ~12% at time of entry
Expiration: March 13^th or 4 trading days till expiration