HiPOS Trade Update: New Trade for a New Year
By Derek Moore
New HiPOS Conservative Trade Established
Today with an increase in volatility we opened a new short put spread in HiPOS Conservative.
Implied volatility is a major input in the calculus of when a new trade qualifies under our strict rules for entry. This one will expire on January 31st and was around 12% out-of-the-money at the time of entry with a profit target of 1%. A little nuance with some market holidays (and the normal weekends) means after the close today (Thursday), there are only 19 trading days left until expiration out of 29 calendar days remaining.
January 20th is a market holiday for Martin Luther King Day (already scheduled), plus the National Day of Mourning January 9th for ex-president Jimmy Carter.
That one was unplanned but now factored into options pricing.
Reviewing the HiPOS Graph
Above we have our typical illustration showing the chart of the S&P 500 Index, the horizonal dotted papaya line showing the short 5200 put level, the blue dotted vertical line representing the January 31st expiration day, and the pink ZEGA Risk Curve.
The distance on that graph from the current SPX price to the short spread leg of 5200 represents the OTM amount. The risk curve represents areas between now and expiration where if the SPX should fall below it, we may take a more defensive posture to further manage risk. We normally point out that the reason that line curves down and to the right is due to the positive time decay inherent in short volatility trades.
The probability of a current market getting to the 5200 level is determined by the current implied volatility, time to expiration, and the distance OTM.
As the days tick by, so long as markets don’t threaten the short put level, we’d expect that probability to decline.
What Are You Rooting For?
Ideally implied volatility to hold here or go lower coupled with a firming of markets or a turn back higher.
The good thing about HiPOS is historically it has offered a lower correlation to equity markets in that the SPX can go down, and you potentially can still realize a profit. What you don’t want is the market to move lower early in the trade and too sharply lower towards that 5200 level.
While normally you don’t want time to go by too quickly, in the case of HiPOS you welcome it as each day that passes means more time value erodes on the short spread.
We’ll have more updates as the trade moves along but for now that’s the big New Year update.
You can check out our website https://zegainvestments.com/products/hipos to learn more about HiPOS, its risks, and benefits for yourself.
Now for the Particulars:
- Index: S&P 500 Index
- Short Credit Spread
- Short put strike: 5200
- Long put strike: 5150
- Put Spread Risk (prob. ITM): <1% at time of entry
- Targeted total return: ~1%
- Distance Put Strike OTM: ~12% at time of entry
- Expiration: January 31st , or 19 trading days until expiration