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New HiPOS Conservative Trade Update

Hedging HiPOS (High Probability Options Strategy) Interest Rates Option Trading S&P 500/SPX Technical Analysis VIX Volatility

By Derek Moore

HiPOS Trade Update: 

Today ZEGA’s traders identified a new short put spread ≈ 13% out-of-the-money (OTM) on the S&P 500 Index (SPX)

This vintage took in a target profit of ≈ 1.24% and has 31 calendar days until the September 27th expiration date (22 trading days). The target profit is higher than our typical 0.8% - 1.0% and reflects the current environment. With the higher relative volatility regime in place and a recent elevation in the near term VIX, this trade became available for us to take advantage of. While our rules are not reliant on technical analysis, we often get asked if we look at the prior lows (support) or resistance levels.

On the graph above you’ll notice that the 4900 level is below the most recent low and the prior low from May.

I would say it’s convenient for this trade, but our rules are more allocated around volatility, time, and price of both the underlying index and the amount of potential profit we are able to take in.

Reviewing the HiPOS Graph

Speaking of our graph, above is the usual display where you can see:

  • The current SPX market price
  • The short 4900 level in our 4900/4500 put spread (outlined in the horizontal orange line)
  • The ZEGA Risk Curve in pink
  • The   vertical dotted blue line representing the Sept 27th expiration date.

The risk curve is where should price pierce below it, ZEGA’s traders may take a more defensive posture to further manage risk.

What Are You Rooting For?

Early in trades you want the market to not move downward too far too fast.

As the time ticks by, the trade has more breathing room evidenced by the ZEGA Risk Curve which slopes down and to the right. Speaking of time, you want the days to pass to start realizing the positive time decay inherent in a short volatility strategy. I mentioned implied volatility is higher of late, but you’d ideally like it to be stable or fall which would help the value of the premium in the spread to move lower.

As we always point out, one of the benefits of HiPOS is that the strategy can potentially make a profit in up, sideways, or down markets so long as it doesn’t move too much as we mentioned earlier.

We’ll wrap up the update there but for more information on HiPOS check out the strategy area on our website to learn more about the risks and benefits. https://zegainvestments.com/products/hipos