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HIPOS Weekly Update: Trade is On

By Derek Moore

Today ZEGA’s traders took an opportunity to put on a new HiPOS short put spread position using the S&P 500 Index (SPX). This was done as the opportunity met all the stringent qualifications under our trading rules.

At the time of entry, the short side of the put spread was about 15% out of the money. This means that the price of the underlying SPX was 15% above the point that the position would go in the money. 

For those new to HIPOS our graph above represents a few things. First, you can see the vertical expiration date line. Then you have the horizontal line representing the short put position that is part of the total spread position.

Most importantly is the curved purple line. This curve represents a point where ZEGA’s trading team may adopt a more defensive posture in order to manage risk.

Recently the market has been making new highs. However, the last two days have provided a short-term spike in volatility. It is a good example of how this strategy is designed to wait for opportunities when they arise while not forcing a new position.

While we just realized a full profit as Friday’s old HIPOS trade expired successfully, the spike in volatility over that last 2 days, reduced our time in cash between trades. You and your clients now will want to root for the market to remain above both the purple line and off course the short leg line as time ticks by realizing positive time decay in premiums.

We’ll be back next week with another update. 

Now for the Particulars:

  • Index: S&P 500 Index
  • Position type: Short Vertical Put Spread
  • Short strike: 2475
  • Long strike: 2425
  • Risk (prob. ITM): 1% at time of entry
  • Targeted return: 1.1%
  • Distance OTM: 15% at time of entry
  • Expiration: May 31st or 24 calendar days

In case you haven't seen our new 1 minute HiPOS video, check it out here.