facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
HiPOS Trade Update: Making Adjustments to Manage Risk Thumbnail

HiPOS Trade Update: Making Adjustments to Manage Risk

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

By Derek Moore

HiPOS Conservative Roll to a Short Iron Condor

Today we made an adjustment to manage risk that included simultaneously closing out the existing short put spread expiring April 25th and selling a short iron condor for May 2nd expiration.

A short iron condor is just a fancy way of describing having both a short call spread and a short put spread on at the same time. We still are using the S&P 500 Index as the underlying (SPX). The reason for doing this was that the SPX had breached below a market level our internal calculations indicated the need for adjustment. I’ll describe the HiPOS graph in a different section, but a good proxy is our ZEGA Risk Curve.

You can see how the SPX crossed below that OLD ZEGA Risk Curve labeled in yellow.

Just because it moves below that doesn’t mean we automatically trade it, but we always note it as a level where we shift our posture to be more defensive.

To give a little more color, at some point as a trade gets too close to the short strike price, the value of the spread starts to accelerate at a greater rate. We want the spread to expire at $0 so when it moves higher, its unrealized loss is growing. Even though it never got to the short strike, we want to manage risk by moving to a safer area.

The new short call strike was about 9.1% out-of-the-money (OTM) while the short put spread sat about 10% OTM. If everything were to expire worthless, the profit target after buying to close the old spread and selling the iron condor would be about 0.4%.

Given the volatility in markets, it’s possible we’ll need to make further refinement between now and expiration.

It’s also important to understand that accounts will still show down when you look at the balances. We suspended the loss on the prior trade by buying time and space with the new trade that is in a better position.

Later I’ll explain what you are rooting for.

Explaining the HiPOS Graph

A lot going on here but don’t worry I’ll Walk you through it.

First, we mentioned the old ZEGA Risk Graph. I left that on there so you could see how the price bar moved down below it by a good amount. Then the new one just labeled ZEGA Risk Curve shows both the upside curve for the short call spread side position and the downside curve for the short put spread side position. The SPX was just about in the middle of those two short strikes of 5700 and 4700.

Expiration day is May 2nd indicated by the vertical blue dotted line.

This is a lot to take in but just understand, we closed out the old position and put on the new position which is on both sides of the market.

What Are You Rooting For?

The market to stay right where it is for a while!

Right now, there is a lot of premium we have sold in the new open position. Remember, we sell premium, and you want the trade to expire worthless to realize a full profit. But for this current trade to move in the right direction, you want volatility to drop and the market to remain rather sideways.

Given the volatility, it’s likely that we may need to make a second adjustment but having both sides with short spreads gives us more options to maneuver. For now, we are in a better position than we would have been if we had stayed in the previous trade.

May 2nd is 28 calendar days and 19 trading days after Friday’s close. In the particulars below you’ll notice all the various position legs. One thing to note is the risk probability is around 15% which refers to the risk of the SPX going above or below one of the short legs. This is higher than we’d normally have due to this being an adjustment roll.

With an Iron Condor the market can’t be in two places at once so if the market moves significantly towards one of the sides, the other one isn’t challenged at the same time.

We’ll be back next week with a new update and of course if we make any adjustments we’ll post an article here.

Lastly, ZEGA has been trading volatility for over a decade, and this isn’t anything we haven’t seen before. Our priority is managing risk for you and your clients. As always reach out to ZEGA with any questions and don’t forget we’ve got a page dedicated to HiPOS where you can check out the risks and benefits of the strategy. https://zegainvestments.com/products/hipos

Now for the Particulars: 

  • Index: S&P 500 Index
  • Short Credit Spread
  • Short put strike: 4700
  • Long put strike: 4650
  • Short call strike: 5700
  • Long call strike: 5750
  • Put Spread Risk (prob. ITM): <15% at time of entry
  • Targeted total return: ~0.4% 
  • Distance Put Strike OTM: ~10% at time of entry
  • Distance Call Strike OTM: ~9.1% OTM at time of entry
  • Expiration: May 2nd   , or 19 trading days until expiration