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How To Explain the Life Cycle of a HiPOS Conservative Trade

By Derek Moore

How can you explain to clients or friends what to expect once the ZEGA trading team has used their rules-based approach to put on a new HiPOS position?

HiPOS is a short volatility strategy that looks to generate income over the long-term utilizing shorter duration trades and taking advantage of natural time decay of options.

But what are the steps you see in accounts and how you should view the trade over time?

What You’ll See in Your Account

  • As trades are allocated to accounts, you’ll see a combination of a short and long option.
  • For a short put spread, a short put has a higher strike price and a long put has a lower strike.
  • For calls, simply reverse this as the short call is at a lower strike price and the long call a higher.
  • In rare instances we utilize both at the same time (short iron condor) so you’ll see four positions.
  • Selling premium generates cash which is added to the cash balance
  • The value of the spread position fluctuates up to expiration or close out of positions
  • Remember the idea is that the value of the spread eventually expires at zero to realize a full profit
  • Once positions expire it may take a few days for the positions to be fully removed from the account

What to Root For

  • Once positions are established you can follow along with our updates (more on that later)
  • Depending on whether you have short calls, puts, or both impacts your direction bias
  • You want the underlying index price to move away from the short strike (or not move at all) 
  • You want time to tick by as short volatility trades benefit from time decay
  • Increased volatility helps trades qualify, but once a position is on you want it to drop

How to Follow Along with Our Updates and Graphs

  • While we have an active HIPOS Conservative trade on we show the key highlights
  • Price: Nothing crazy here as you can see the price of the underlying Index represented by the candlestick chart with green and red bars.
  • Expiration date shown using the vertical dark blue line (9-17 on this trade)
  • Short strike: Shown relative to the market (dotted orange line at 3700) 
  • Note: If we had a short call spread this would be above the market or on both sides in cases where we use both a short call and short put spread. 
  • Purple Defensive Posture Curve: This is the lighter purple curve that illustrates where if the price were to move below, our traders may take additional defensive measures.
  • What measures you ask? Quite a bit in the ZEGA toolbox but rolling further away, rolling out in time, closing early, or even rolling in closer. 

 How This Trade Is Doing?

  • Time Decay: Positive progression as including the open Monday 9-13 there are only 5 trading days left to expiration
  • Price: Positive, even with Friday’s pullback as the S&P 500 Index is still roughly 20% above the short 3700 strike.
  • Volatility: Neutral/Negative volatility jumping higher caused a negative movement in the spread value but less impactful due to the index being so far above the short put strike
  • Defensive Posture Curve: Positive as price remains well above the curved line which moves lower and to the right closer to expiration.

So, there is an update coupled with a tutorial on what you’ll see, what to root for, and how to follow our updates. 

As I mentioned if we had a short call spread on the graph would look different. When we have both on, you’ll see both short strikes and a pair of light purple defensive posture curves. 

If anything should change, we’ll be back with an update. As always reach out to a member of the ZEGA team with questions around your existing HiPOS accounts or how to use in portfolios.