HiPOS Trade Update: Opportunity to Roll Early

By Derek Moore

HiPOS Conservative Trade Roll

Friday’s increase in volatility and down move in markets created the conditions where it made sense to close out the old HiPOS trade and “roll” into a new one.

Roll is the term we use when we simultaneously buy back to close the prior position and sell to open the new short put spread all at once. In doing so, we netted an additional 0.9% and did so a week before the original trade was due to expire. The new trade had at the time of entry 4 calendar weeks before expiration, but only 3 weeks after the original trade was due to expire.

For the new position we moved expiration out from February 28th to March 21st.

The graph is where all the visual action is and this time, we decided to include some details we don’t normally show.

Explaining the Graph (and roll)

This one is going to need some explanation, but I think you’ll like it.

Above are all the normal notes, but what you’ll see is the old and new markers. At the bottom, you see the old dotted horizontal line showing where the 5200 short put leg was in the spread and right under that the new short 5150 put leg. So, we moved the strikes down 50 points. The old expiration in the bottom half is that short vertical line showing where February 28th was compared to the long vertical line from top to bottom indicating the March 21st expiration date. 

The ZEGA risk curves in pink where you see the old curve shifted to the right where you see the new one.  

That risk curve shows where if the price should close below it, we may take additional defensive measures to manage the trade.

The distance between the price of the SPX (the underlying) and the short put leg is considered the out of the money amount. At the time of entry, it was about 14.5% OTM. Next update I’ll remove all the “old” markers but for this one I think its helpful to see how things change with a HiPOS roll.

As you’ll see, what you want in the trade stays the same.

What Are You Rooting For?

First and foremost, you want the SPX to move higher, trade sideways, or just not go down too far too fast into the trade.

Time decay as always is your friend on a short volatility trade. There are 20 trading days left as of entry Friday and as the calendar moves forward, more and more time premium melts away from the position. A drop in volatility would also help to assuage the value of the spread that you eventually want to be worthless at expiration.

Hopefully you liked the more detailed graph and explanation this week.

As always, reach out to ZEGA Investments for more information on HiPOS and you can review the presentation and materials illustrating the risks and benefits of the strategy here: https://zegainvestments.com/products/hipos