Buy A Put SPY Concept

[mkingsley 0]

Hello Everyone.

I am brand new here and still trying to learn about options. I am sure I am not the first to say that I understand the basic concepts, but that when it comes down to nuts & bolts, I get confused and very frustrated. So I am going to offer, what I think is, a simple example with questions, in the hopes that I and others may learn a little more about how options work.

Let’s say you have a back to the future car and find out in your travels that the market is going to start crashing on Aug 1, 2020 with a final bottom on Aug. 20th, 2020. You come back to present (5/4/2020) and want to buy SPY put options, but you are not sure which options to buy that will make the most money. It's frustrating, because you already know that the SPY, for example, will drop to 180 and that it will happen on Aug. 20th, 2020.

 

Here are my questions, but there may be others that I am not thinking about:

 

One frustration is in choosing a strike price. If you know the SPY will drop to 180 and want to buy put options and sell them later on after the drop, is it a better idea to buy contracts closer to the 180 price, the actual 180 contract, or is it better to buy contracts that are closer to “in the money”, but still out of the money to save on some premium? Would the amount you make be different? I understand that as you get closer to "in the money" that the price goes up for the contract, but is safer.

Looking at current prices, here's what contracts cost:

 

Aug. 21 2020 Option

180 strike - $1.64

280 strike - $19.46

 

Sep 18 2020 Option

180 strike - $2.29

280 strike - $22.10

 

 

The other frustration is choosing a date. Should one buy the Sept 18th or the Aug. 21st contracts? My gut tells me the Aug. 21st would be better, because you could sell the options before expiration since someone would be able to then buy the SPY at that price, vs the Sept. 18th, because of the chance of the SPY bouncing up again.

 

Hopefully this makes sense...but just to recap, basically I'd like to understand what strategy would be best if you absolutely knew a stock, or in this case, an ETF, was going to drop to a certain price in the future.

 

Thanks in advance for any help in understanding this more.

 

-Michael

 

 

 

[Yowster 7,995]

@mkingsley When buying long options, be aware that their prices are very expensive due to increased volatility.   Although off the IV peak of over 5x the normal level, SPY options currently have IV of around 3x the normal level.   This means options cost a lot more in this market climate.   One was to reduce (but not eliminate) the effect of IV dropping is to buy a put spread instead of just an outright put.   You would put a cap on gains, although you can make the put spread wide enough to allow for a large gain if the stock price drops a lot.   But the positive aspect is you are not as much vega negative.

[mkingsley 0]

Hi and thank you for the reply. I understand partially what you are saying about implied volatility, but if one still wants to make an investment anyways, because, like I said, that person went to the future and already knows that the SPY will drop to the example level given...180, what would be the straight forward idea to take full advantage?

 

Thanks again for the insights.

[Kim 7,451]

You could simply look at option that provides the best percentage gain. For example, looking at current prices for Aug21 puts:

• 280 put is 19.50, will be 100
• 250 put is 10.50, will be 70
• 220 put is 5.20, will be 50
• 210 put is 3.90, will be 30
• 200 put is 2.90, will be 20
• 190 put is 2.17, will be 10

Looks like 200-220 range offers the best percentage return.

[EdSeba 34]

2 hours ago, mkingsley said:

Let’s say you have a back to the future car and find out in your travels that the market is going to start crashing on Aug 1, 2020 with a final bottom on Aug. 20th, 2020. You come back to present (5/4/2020) and want to buy SPY put options, but you are not sure which options to buy that will make the most money. It's frustrating, because you already know that the SPY, for example, will drop to 180 and that it will happen on Aug. 20th, 2020.

That's an awfully good car. I usually don't have anywhere near good data like that. But it helps answer some questions you have. My take on your questions below, but veterans on the board might be able to give more competent advice.

 

2 hours ago, mkingsley said:

The other frustration is choosing a date. Should one buy the Sept 18th or the Aug. 21st contracts? My gut tells me the Aug. 21st would be better, because you could sell the options before expiration since someone would be able to then buy the SPY at that price, vs the Sept. 18th, because of the chance of the SPY bouncing up again.

You can sell your puts whenever you want, so you would want to choose the expiry that benefits the most from the drop in stock price, not the one that might benefit someone who wants to buy SPY. That said...

 

2 hours ago, mkingsley said:

One frustration is in choosing a strike price. If you know the SPY will drop to 180 and want to buy put options and sell them later on after the drop, is it a better idea to buy contracts closer to the 180 price, the actual 180 contract, or is it better to buy contracts that are closer to “in the money”, but still out of the money to save on some premium?

I would start from the amount of money that I am willing to risk on this bet. Like you say, options have a wide range of prices, depending on various factors and strike is one of them. Let's say you had $10,000 to make the most of this information you have. 
 

Because you know exactly when the market will start crashing Aug 1st, then you want to buy those puts on Jul 31st. Buying prior to that date means you're buying additional time value in those puts. You don't need it if you are certain when it'll crash. Obviously, reality is much different than that and we're willing for that time value of options in case things don't pan out like we thought they would. Nothing worse than being right about direction of a stock, but being wrong about timing (have the market crash after your puts expire).

 

With said $10,000 which are available to buy puts to hedge a portfolio or simply make a speculative bet, like you said you could buy ATM, OTM puts with different strikes. I'm sure there are calculators out there which could provide you with excellent PnL simulations for different scenarios, but roughly you could get one of the below:

60 puts, Aug. 21, 180 strike - $1.64

5 puts, Aug. 21, 280 strike - $19.46

43 puts, Sep 18, 180 strike - $2.29

4 puts, Sep 18, 280 strike - $22.10

 

Obviously 60 puts are better than 4. They give you optionality over 6,000 shares of SPY or $1,680,000 in underlying position. In contrast, for the 4 puts you have only $112,000 in underlying stock. Obviously, a 35% fall in the underlying stock won't equate to you gaining 35% on the $1,680,000 or on the $112,000. That's because different strikes have different deltas, which will indicate the degree to which the option price will move with shifts in the price of the underlying.
- Delta will be around 0.5 on strikes closest to the current price of the underlying and will get smaller and smaller the further OTM your strike is. 

- Delta will be the same (around 0.5) on strikes closest to underlying spot, but on strikes which are deep OTM or ITM, (using the same strike e.g. 180) delta will be higher on the longer maturity.

- Delta is dynamic, so it'll increase when underlying price shifts in the direction that makes your trade profitable (down for puts, up for calls)

 

To put all of the above in practice, again taking your strikes, you have a delta of roughly -0.5 for the two puts with strike at 280 (Aug and Sep), a delta of -0.044 for the Aug 180 put and a delta of -0.055 for the Sep 180 put. As a result,  every 1 point downward move in SPY will impact the 4 different potential positions (all worth close to $10,000) as follows:

Aug 21, 180 strike: 0.044 * 60 * 280 = $739.20

Aug 21, 280 strike: 0.5 * 5 * 280 = $700

Sep 18, 180 strike: 0.055 * 43 * 280 = $662.20

Sep 18, 280 strike: 0.5 * 4 * 280 = $560

 

Differences are not huge. However as delta is dynamic, the above is true for the first point move in SPY. Should you see a large downward move in your favor, the additional gains that you make start to look much different. This is because if SPY moves to let's say 230, then the new deltas for the puts will be roughly -0.166 for Aug 180 puts, -0.92 for Aug 280 puts, -0.186 for Sep 180 puts and -0.89 for Sep 280 puts. Which means that the next point move down (from 230 to 229) will see the below gains in your positions:

Aug 21, 180 strike: 0.166 * 60 * 230 = $2,290.80

Aug 21, 280 strike: 0.92 * 5 * 230 = $1,058

Sep 18, 180 strike: 0.186 * 43 * 230 = $1,839.54

Sep 18, 280 strike: 0.89 * 4 * 230 = $818.8

 

As can be seen, though initially the value of your positions and initial gains are the same across maturities and different strikes (by design), by the time this reached bottom (180 in your scenario), the Aug 180 puts will be worth roughly $275,000, Aug 280 worth $50,000, Sep 180 worth  $110,000 and Sep 280 worth $42,000. Roughly because, as @Yowster notes above, option prices will increase also due to volatility increase. 

If you had a car that let you know exactly when the market crashes, you take the risk out of the equation, so you don't care about time decay and other variables, which in reality make or break a trade. In that case you can fine tune that with different combos where you become even more leveraged and increase your gains. But in reality, that's something with a negligible chance of being a successful trade.

 

2 hours ago, mkingsley said:

Hopefully this makes sense...but just to recap, basically I'd like to understand what strategy would be best if you absolutely knew a stock, or in this case, an ETF, was going to drop to a certain price in the future.

 

BTW what's that stock? My message box is open haha

 

Later edit: calculations imply the move in a very short period of time. You did give Aug 20th as the day for a bottom, so  then @Kim's numbers make more sense for the Aug expiry. Puts expiring in September will more likely have a higher value and percentage gain due high volatility around that time. You can, of course, sell the Sep puts on Aug 21st.

Edited May 4, 2020 by EdSeba

[mkingsley 0]

EdSeba... BTW what's that stock? My message box is open haha ...LOL

I wish I had the ultimate crystal ball. The stock I used in the example is just the SPY, ETF that follows S&P 500. The car mentioned that goes in the future is just the The Delorean from "back to the future"

I'll have to study your post in great detail to pick it apart, since I am a newby But thank you so much for all of the details.

 

 

[mkingsley 0]

10 minutes ago, Kim said:

You could simply look at option that provides the best percentage gain. For example, looking at current prices for Aug21 puts:

• 280 put is 19.50, will be 100
• 250 put is 10.50, will be 70
• 220 put is 5.20, will be 50
• 210 put is 3.90, will be 30
• 200 put is 2.90, will be 20
• 190 put is 2.17, will be 10

Looks like 200-220 range offers the best percentage return.

Thank you for the reply. Since I am really new to this, how did you derive the percentage gain? I am trying an online calculator now to try to figure this out, but would be nice to know how to figure this out on my own. BTW, this is a great forum and glad I found it! Glad to see that people actively engage here and help out. I hope to return the favor in the future to another newby.

[Yowster 7,995]

@EdSeba Don't discount the effect of IV dropping and it's negative impact on longer term options.  As noted in my earlier post, SPY's IV is 3x normal levels.   So, if the SPY gradually declines then its possible that IV might actually drop and offset the positive impact of stock price movement.   However, if the SPY gaps down then IV will likely increase and be a double positive for a holder of long puts.  If the SPY price rises then IV would likely fall and that would be a double negative to the trade.    All I'm saying is that being long puts or calls without any shorts to hedge is inherently riskier right now, because both the stock price directional changes and the significant IV changes likely to occur will both have  a big impact on the trade performance.   Compare this to entering a trade like this when IV as around normal levels, in this scenario you still have the directional changes impacting the trade but you don't have the risk of IV dropping significantly.

[Kim 7,451]

11 minutes ago, EdSeba said:

 

Later edit: calculations imply the move in a very short period of time. You did give Aug 20th as the day for a bottom, so  then @Kim's numbers make more sense for the Aug expiry. Puts expiring in September will more likely have a higher value and percentage gain due high volatility around that time. You can, of course, sell the Sep puts on Aug 21st.

My calculation was based on the price at Aug expiration. We don't know how we get there so obviously if at some point between now and August expiration SPY is lower than 180, then the gains will be higher. You can also do Sep options, but we don't know what the IV will be on Aug 21, hard to calculate the value of Sep options.

 

2 minutes ago, mkingsley said:

Thank you for the reply. Since I am really new to this, how did you derive the percentage gain? I am trying an online calculator now to try to figure this out, but would be nice to know how to figure this out on my own. BTW, this is a great forum and glad I found it! Glad to see that people actively engage here and help out. I hope to return the favor in the future to another newby.

The percentage gain is simply the price at August expiration divided by the current price. No different from calculating gains on stocks.

[Kim 7,451]

2 minutes ago, Yowster said:

@EdSeba Don't discount the effect of IV dropping and it's negative impact on longer term options.  As noted in my earlier post, SPY's IV is 3x normal levels.   So, if the SPY gradually declines then its possible that IV might actually drop and offset the positive impact of stock price movement.   However, if the SPY gaps down then IV will likely increase and be a double positive for a holder of long puts.  If the SPY price rises then IV would likely fall and that would be a double negative to the trade.    All I'm saying is that being long puts or calls without any shorts to hedge is inherently riskier right now, because both the stock price directional changes and the significant IV changes likely to occur will both have  a big impact on the trade performance.   Compare this to entering a trade like this when IV as around normal levels, in this scenario you still have the directional changes impacting the trade but you don't have the risk of IV dropping significantly.

This comment is definitely true in the real world - the original question referred to a fantasy world where you know the value of the stock at expiration. In this fantasy world, IV is not that important because we could just buy the option that provides the best percentage gain at expiration and ignore all the "noise" in between.

Of course we all know this is possible only in a fantasy world, not the real world, so your comment is very relevant, especially as a warning to new traders who tend to ignore the IV or underestimate its impact.  

[EdSeba 34]

13 minutes ago, Yowster said:

All I'm saying is that being long puts or calls without any shorts to hedge is inherently riskier right now, because both the stock price directional changes and the significant IV changes likely to occur will both have  a big impact on the trade performance. 

I agree. I might be very cheap as I always felt options are generally too expensive to buy. And this community definitely helps getting ideas and finding alternatives that suit different risk profiles.

But I was commenting simply on the coordinates presented by @mkingsley, where we already know that a big drop is coming. In the real world, one needs to take into account many other variables, including personal risk appetite.

Edited May 4, 2020 by EdSeba
typos

[mkingsley 0]

Thanks for the replies about the IV...that is definitely something to look at from my initial readings on options thus far. Like was stated, this is just a fantasy trade to try and understand how different prices and dates interact.

It's interesting, when I used an online calculator, it looks like that you make much more money on this fantasy trade if you buy a put option that is closer to in the money. I'll post the screenshots of the breakdown, but here are the data points...

 

18th Sep $280.00 Put

total cost: $2,213

Value at expiration: $7,787

Net Profit: $5,574

********************************

 

18th Sep $200.00 Put

total cost: $400

Value at expiration: $1,600

Net Profit: $1,200

 

So, my assumption is incorrect then that you can make more money buying the contract closer to what you know it is going to drop to and should still buy an option cloder to in the money.

 

Let me know if in my fantasy that would be correct.

 

Thanks again!

 

[Kim 7,451]

You need to think in percentage terms, not dollar terms. In order to compare apples to apples, you need to allocate equal dollar amount to each trade. So if you buy 1 280 contract, you need to buy around 5 200 contracts to reach approximately same dollar amount in terms of position sizing.

[mkingsley 0]

5 minutes ago, Kim said:

You need to think in percentage terms, not dollar terms. In order to compare apples to apples, you need to allocate equal dollar amount to each trade. So if you buy 1 280 contract, you need to buy around 5 200 contracts to reach approximately same dollar amount in terms of position sizing.

Ahhh...got it..

 

18th Sep $280.00 Put

total cost: $2,213

Value at expiration: $7,787

Net Profit: $5,574

********************************

 

18th Sep $200.00 Put

total cost: $400 x 5 = $2000

Value at expiration: $1,600 x 5 = $8,000

Net Profit: $6,000

[yalgaar 40]

11 minutes ago, mkingsley said:

18th Sep $280.00 Put

total cost: $2,213

Value at expiration: $7,787

Net Profit: $5,574

********************************

 

18th Sep $200.00 Put

total cost: $400

Value at expiration: $1,600

Net Profit: $1,200

 

So, my assumption is incorrect then that you can make more money buying the contract closer to what you know it is going to drop to and should still buy an option cloder to in the money.

Based on what you are posting, your assumption is correct....not sure why you say it is incorrect. 

When you chose ATM, you made around 200% profit, when you chose the strike where you knew price would go....you made exact 300% profit.

[mkingsley 0]

29 minutes ago, yalgaar said:

Based on what you are posting, your assumption is correct....not sure why you say it is incorrect. 

When you chose ATM, you made around 200% profit, when you chose the strike where you knew price would go....you made exact 300% profit.

Yeah, I was not comparing apples to apples, and looking at $ instead of percentages.

[mkingsley 0]

3 hours ago, Yowster said:

@mkingsley When buying long options, be aware that their prices are very expensive due to increased volatility.   Although off the IV peak of over 5x the normal level, SPY options currently have IV of around 3x the normal level.   This means options cost a lot more in this market climate.   One was to reduce (but not eliminate) the effect of IV dropping is to buy a put spread instead of just an outright put.   You would put a cap on gains, although you can make the put spread wide enough to allow for a large gain if the stock price drops a lot.   But the positive aspect is you are not as much vega negative.

How can I check the Implied Volatility levels over time? Is there a chart that can be produced within thinkorswim? Other sites I can investigate this more? Sounds like IV is important to understand so I want to make sure I fully understand this, so if you have any good resources to review, I would appreciate it.

 

Thanks in advance.

[mkingsley 0]

1 hour ago, EdSeba said:

That's an awfully good car. I usually don't have anywhere near good data like that. But it helps answer some questions you have. My take on your questions below, but veterans on the board might be able to give more competent advice.

 

You can sell your puts whenever you want, so you would want to choose the expiry that benefits the most from the drop in stock price, not the one that might benefit someone who wants to buy SPY. That said...

 

I would start from the amount of money that I am willing to risk on this bet. Like you say, options have a wide range of prices, depending on various factors and strike is one of them. Let's say you had $10,000 to make the most of this information you have. 
 

Because you know exactly when the market will start crashing Aug 1st, then you want to buy those puts on Jul 31st. Buying prior to that date means you're buying additional time value in those puts. You don't need it if you are certain when it'll crash. Obviously, reality is much different than that and we're willing for that time value of options in case things don't pan out like we thought they would. Nothing worse than being right about direction of a stock, but being wrong about timing (have the market crash after your puts expire).

 

With said $10,000 which are available to buy puts to hedge a portfolio or simply make a speculative bet, like you said you could buy ATM, OTM puts with different strikes. I'm sure there are calculators out there which could provide you with excellent PnL simulations for different scenarios, but roughly you could get one of the below:

60 puts, Aug. 21, 180 strike - $1.64

5 puts, Aug. 21, 280 strike - $19.46

43 puts, Sep 18, 180 strike - $2.29

4 puts, Sep 18, 280 strike - $22.10

 

Obviously 60 puts are better than 4. They give you optionality over 6,000 shares of SPY or $1,680,000 in underlying position. In contrast, for the 4 puts you have only $112,000 in underlying stock. Obviously, a 35% fall in the underlying stock won't equate to you gaining 35% on the $1,680,000 or on the $112,000. That's because different strikes have different deltas, which will indicate the degree to which the option price will move with shifts in the price of the underlying.
- Delta will be around 0.5 on strikes closest to the current price of the underlying and will get smaller and smaller the further OTM your strike is. 

- Delta will be the same (around 0.5) on strikes closest to underlying spot, but on strikes which are deep OTM or ITM, (using the same strike e.g. 180) delta will be higher on the longer maturity.

- Delta is dynamic, so it'll increase when underlying price shifts in the direction that makes your trade profitable (down for puts, up for calls)

 

To put all of the above in practice, again taking your strikes, you have a delta of roughly -0.5 for the two puts with strike at 280 (Aug and Sep), a delta of -0.044 for the Aug 180 put and a delta of -0.055 for the Sep 180 put. As a result,  every 1 point downward move in SPY will impact the 4 different potential positions (all worth close to $10,000) as follows:

Aug 21, 180 strike: 0.044 * 60 * 280 = $739.20

Aug 21, 280 strike: 0.5 * 5 * 280 = $700

Sep 18, 180 strike: 0.055 * 43 * 280 = $662.20

Sep 18, 280 strike: 0.5 * 4 * 280 = $560

 

Differences are not huge. However as delta is dynamic, the above is true for the first point move in SPY. Should you see a large downward move in your favor, the additional gains that you make start to look much different. This is because if SPY moves to let's say 230, then the new deltas for the puts will be roughly -0.166 for Aug 180 puts, -0.92 for Aug 280 puts, -0.186 for Sep 180 puts and -0.89 for Sep 280 puts. Which means that the next point move down (from 230 to 229) will see the below gains in your positions:

Aug 21, 180 strike: 0.166 * 60 * 230 = $2,290.80

Aug 21, 280 strike: 0.92 * 5 * 230 = $1,058

Sep 18, 180 strike: 0.186 * 43 * 230 = $1,839.54

Sep 18, 280 strike: 0.89 * 4 * 230 = $818.8

 

As can be seen, though initially the value of your positions and initial gains are the same across maturities and different strikes (by design), by the time this reached bottom (180 in your scenario), the Aug 180 puts will be worth roughly $275,000, Aug 280 worth $50,000, Sep 180 worth  $110,000 and Sep 280 worth $42,000. Roughly because, as @Yowster notes above, option prices will increase also due to volatility increase. 

If you had a car that let you know exactly when the market crashes, you take the risk out of the equation, so you don't care about time decay and other variables, which in reality make or break a trade. In that case you can fine tune that with different combos where you become even more leveraged and increase your gains. But in reality, that's something with a negligible chance of being a successful trade.

 

BTW what's that stock? My message box is open haha

 

Later edit: calculations imply the move in a very short period of time. You did give Aug 20th as the day for a bottom, so  then @Kim's numbers make more sense for the Aug expiry. Puts expiring in September will more likely have a higher value and percentage gain due high volatility around that time. You can, of course, sell the Sep puts on Aug 21st.

I just read everything 3x so I could let in sink in. Your breakdown is great!

To everyone, I really appreciate the analysis of this trade.

 

Obviously, it would be a 1 in a million chance of happening, but as quoted in "Dumb & Dumber":

Mary Swanson : I'd say more like one out of a million.

Lloyd Christmas : [long pause while he processes what he's heard] So you're telling me there's a chance. YEAH!

 

 

[Yowster 7,995]

31 minutes ago, mkingsley said:

How can I check the Implied Volatility levels over time? Is there a chart that can be produced within thinkorswim? Other sites I can investigate this more? Sounds like IV is important to understand so I want to make sure I fully understand this, so if you have any good resources to review, I would appreciate it.

IV charts are available from a variety of places, IVolatility tools are available directly from within SteadyOptions, VolatilityHQ and Chartaffair also have them.   The IV charts show a weighted average IV (because technically each strike and each expiration has its own IV).   Here's a SPY IV chart:

 

[mkingsley 0]

6 minutes ago, Yowster said:

IV charts are available from a variety of places, IVolatility tools are available directly from within SteadyOptions, VolatilityHQ and Chartaffair also have them.   The IV charts show a weighted average IV (because technically each strike and each expiration has its own IV).   Here's a SPY IV chart: 

 

Thanks for this. I will check it out.

Just so I understand correctly, right now its around 3x the IV as a normal market. During the dip on March 17th, it went to 7x. But that's over a short time and would only be really beneficial to a fantasy trade as discussed if the market crashed quickly again, right?

One can argue that history shows market corrections usually do a quick drop, but then recover, and then if it is a recession or depression, the move down to a bottom usually takes a lot longer, 1 to 2 years.

So what you are saying is that the fantasy trade mentioned would suffer because volatility would probably go down from here, seeing that historically the downtrends happen more slowly (2-3% a month lets say) So the price might be met, but the IV would cause the prices of the contracts to still go down in price?

I guess that opens up other questions if my understanding is correct.

If you know the current IV and want to project the price of a contract based on price movement and the affect IV will have based upon its ups and downs, can that be calculated?

 

Meaning, lets say one does buy this:

 

 

18th Sep $200.00 Put (5 contracts)

total cost:  $2000

 

I'm not sure how to find the IV for that specific option contract, but lets say it's like the graph shows, at 32%. If the price target was met, but the IV goes down to the average of 10%, how would that be calculated?

 

Thanks in advance.

 

[Arthur 32]

Here is a real world example: around March 15 I got an info "from the future" that SPX would fall below 2000 by the end of April. So, I bought a bunch of APR and MAY puts. That didn't go well

[Yowster 7,995]

@mkingsley There are a bunch of option price calculators out there, just google it.   You typically enter the stock price, the strike price, days to expiration and IV% and it calculates the option price.  But for an example, using the SPY September 280 strike:

• Current IV is ~33%  (or 3x normal) and Sept 280 put is $21.20
• If IV was ~22% (2x normal) the Sept 280 put price would be $13.40
• If IV was ~11% (normal) the Sept 280 put price would be $5.90
• If IV was ~44% (4x normal) the Sept 280 put price would be $28.50

Given these numbers you can see how IV changes can have a big impact (positive or negative) on the ultimate trade performance.   When you enter a trade like this in more normal times, you basically know that IV isn't going to have a huge drop below its current level (although it can have a large spike upward that would help).

 

Normally, when the market falls IV rises and when the market rises IV falls.    But.... during this market climate we've seen IV actually drop on days when the market declines - it's like the market was pricing in a 1000 point drop into the options prices, but when it only fell 500 points the volatility dropped.  So, with SPY currently around 3x the normal level if we see a gradular price decline it's very possible for IV to also drop (but as I said in the prior post, a big gap downward in stock price would likely come with an IV rise).

 

One other thing to be aware of, the IV charts shows show IV at near ATM strikes, as you get farther away from ATM there is a natural skew to the IV at those strikes:

• For PUTS -  OTM IV > ATM IV > ITM IV
• For CALLS - OTM IV < ATM IV < ITM IV

[mkingsley 0]

1 hour ago, Yowster said:

@mkingsley There are a bunch of option price calculators out there, just google it.   You typically enter the stock price, the strike price, days to expiration and IV% and it calculates the option price.  But for an example, using the SPY September 280 strike:

• Current IV is ~33%  (or 3x normal) and Sept 280 put is $21.20
• If IV was ~22% (2x normal) the Sept 280 put price would be $13.40
• If IV was ~11% (normal) the Sept 280 put price would be $5.90
• If IV was ~44% (4x normal) the Sept 280 put price would be $28.50

Given these numbers you can see how IV changes can have a big impact (positive or negative) on the ultimate trade performance.   When you enter a trade like this in more normal times, you basically know that IV isn't going to have a huge drop below its current level (although it can have a large spike upward that would help).

 

Normally, when the market falls IV rises and when the market rises IV falls.    But.... during this market climate we've seen IV actually drop on days when the market declines - it's like the market was pricing in a 1000 point drop into the options prices, but when it only fell 500 points the volatility dropped.  So, with SPY currently around 3x the normal level if we see a gradular price decline it's very possible for IV to also drop (but as I said in the prior post, a big gap downward in stock price would likely come with an IV rise).

 

One other thing to be aware of, the IV charts shows show IV at near ATM strikes, as you get farther away from ATM there is a natural skew to the IV at those strikes:

• For PUTS -  OTM IV > ATM IV > ITM IV
• For CALLS - OTM IV < ATM IV < ITM IV 

This is excellent information! I think in this one thread I have already learned more then all of the videos I've watched.

It is much appreciated and hopefully be very useful to everyone that reads it.

[Kim 7,451]

21 minutes ago, mkingsley said:

This is excellent information! I think in this one thread I have already learned more then all of the videos I've watched.

It is much appreciated and hopefully be very useful to everyone that reads it.

This is what we do. A practical  down to earth approach to options trading, the most engaged community and proven results.

[Twsty81 5]

On 5/4/2020 at 4:12 PM, Arthur said:

Here is a real world example: around March 15 I got an info "from the future" that SPX would fall below 2000 by the end of April. So, I bought a bunch of APR and MAY puts. That didn't go well

Yep, I got that same message and loaded the boat on In/Out put spreads when SPY was at 240/250. Now I'm praying for it to go down. Every tick up is painful....

Praying is a strategy right!!?? Lol

Edited May 6, 2020 by Twsty81