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New HiPOS Trade: Late Day Dive Creates Opportunity

By Derek Moore

New HiPOS Conservative Trade

Today after a brief respite, a new HiPOS short put spread position was initiated late in Thursday’s trading session.

The S&P 500 Index opened lower and after a midday recovery moved back down in the last hour of trading. While we don’t try and time markets, when entering a short put spread, we like to be opportunistic by picking our spots. This way our entry coincides with a move lower, albeit one that was less than 1% on this day.

Today volatility moved back higher after yesterday’s lowest level in over a year.

HiPOS feeds off volatility so that along with the markets move lower allowed for an entry.

HiPOS Position Graph

Above we see our normal graph tracking the price of our underlying (S&P 500 Index), expiration date (May 19th), and short put strike level of 3500.

At the time of entry, the S&P sat roughly 15% above that 3500 level. This is the amount the short put leg of the spread was out of the money. Then we have the curved purple line. We like to include this as it provides a visual of where, should price close below this line, ZEGA’s traders may take a more defensive posture to further manage risk.

The more time that passes towards expiration day, the more time decay erodes the value (premium) of the spread.

As sellers of volatility, we take in premium and eventually want that value to go to zero at expiration to realize a full profit.

The sloping nature of our purple defensive posture line reflects that positive erosion of time decay and reduced probabilities that a market will reach that 3500 area. If you are thinking that a HiPOS position has more room to breathe later in the trade you’d be correct.

Off course we have rules for all of this, but we like to give a little insight and what you want to root for.

What Are You Rooting For?

Since this is a short put spread, you want the markets to hang out where they are or move higher ideally.

It’s also fine if markets move lower so long as they don’t move too far too fast down towards that 3500 level. As we mentioned above, as a trade seasons and time decay starts to erode, flexibility in where the S&P 500 Index can go expands.

It’s worth noting you also don’t want volatility to experience a large spike higher as that will negatively impact the unrealized gain or loss of an open position.

Don’t worry, we’ll keep you updated each week on the progress so if you haven’t already signed up to receive an email when we post updates, you should do that!

 Now for the Particulars: 

  • Index: S&P 500 Index
  • Position type: Short Put Spread
  • Short put strike: 3500
  • Long put strike: 3450
  • Put Spread Risk (prob. ITM): < 1% at time of entry
  • Targeted total return: ~1%
  • Distance Put Strike OTM: ~15.1% at time of entry
  • Expiration: May 19th, or 21 trading days until expiration