Last Update: August 2021
Low volatility got you down? No need for Debbie Downer. You got options, baby. Just put the credits to rest for a spell and try a debit play or two. Last week I touched on using calendars to play the low VIX levels. Today I want to throw out another idea that not only games the low implied volatility, but also volatility skew. Plus, it’ll add some negative delta to your portfolio to hedge against any kind of market correction over the next couple of months.
Bear put spreads might be just the ticket here. The vertical debit spread consists of buying to open a higher strike put while selling to open a lower strike put in the same expiration cycle. The premium received from the short put reduces the overall cost of the trade. And since the net cost is the max loss in the position, the put spread is a much less risky way of acquiring protection than a straight up put buy.
The low VIX is keeping a lid on option premiums making the cost of the bear put quite tame. The cheaper the cost, the less the market has to fall before your put spread really starts rolling in the dough. With the SPY at $206.25, suppose you buy the June 205/200 put spread for $1.50 or so. That is, buy the Jun 205 put while selling the Jun 200 put.
The max loss is limited to the initial $1.50 debit and will be forfeited if SPY is above $205 at expiration. The max gain is limited to the distance between strikes minus the net debit, or $3.50, and will be captured if SPY sits below $200 at expiration.
By risking $1.50 to make $3.50, the spread offers a 233% return. And that’s if SPY falls a mere 3% from here. Why, hello leverage. By going out to June we give the market 74 days to stage some type of pullback following its rocket ship rise.
On to volatility skew., which is a topic that definitely merits some further commentary. Perhaps another time. Here’s the short version. Implied volatility reflects the amount of demand for an option. The higher the demand the more expensive the option. And the more expensive the option the higher the implied volatility. Since the demand for every strike price is different they often boast varying implied volatilities. This variation in volatility from one strike to the next is often referred to as volatility skew.
Since demand for out-of-the-money puts usually exceeds demand for at-the-money puts, or calls for that matter, the implied vol gets gradually higher as you move further OTM.
By design, the bear put spread capitalizes on volatility skew by purchasing a lower volatility option and selling a higher volatility option. See the accompanying chart for illustration.
Just something to consider for those wondering what types of plays makes sense in this environment.
—
If you’re a new trader, stick to your rules and try to process these concepts as you go. You don’t have to know everything to be able to follow your rules and make a trade. Generally, playbooks—like our own Trading Playbook (for PRO Members only) —are invaluable resources for new traders so that you don’t get your head spinning too much on the definitions.
Options Trading for Beginners
Continue learning the basics of Options trading with this additional freemium content from Tackle Trading.
Options 101 [Free Content]
Access more free high-quality articles to improve your knowledge of Options Trading.
Options for Beginners: Meet a Popular Greek Named “Delta”
In this article, Gino Poore delivers a great lesson on understanding and using the Delta of an option.
How to add Insurance to your Portfolio
In this video tutorial, Coach Matt takes a look at different ways to protect your portfolio accounts when the market goes south.
Options 101: Getting Started
The goal of this Options 101 series is to educate you as a trader and help you develop the right perspective on how to use options in your business.
Options 101: Expiration, Strikes, and Basics
Learn the basics on what is an option, options expirations, call and put options and also strike prices.
Options 101: Bid/Ask, Open Interest and Volume
In this Options 101 article, we will look at the Bid/Ask spread, open interest, volume, and how these characteristics affect a trader’s decision-making.
Options 101: The Language of Options
In this article, we’ll dive into some of the language and definitions you’ll hear as an options trader.
Options 101: Naked Put Basics video
In this video edition of the series, Coach T examines the basics of the Naked Put strategy.
Options 101: Managing Credit Spreads (Thinkorswim Tutorial)
In this tutorial video, Coach T shows how to manage a credit spread and how to set up a contingency in ThinkOrSwim.
Options 101: Bull Put Spread Research
In this video, Coach Tim walks you through how to find candidates for bull put spreads.
Options 101: Risk Graph Basics (Thinkorswim Tutorial)
In this Thinkorswim tutorial video, Coach T walks the team through how to use the risk graph for options trading.
Options 101: How to set Basic Stops on Naked Puts and Covered Calls
In this video tutorial, Coach T walks the team through how to set a basic stop on a covered call or naked put position.
How to Protect Your Retirement
Coach Matt from Tackle Trading looks at how passive and active investors can insure their retirements against another potential market crash like in the sub-prime crisis of 2008-09.
How to use the Theta Research Tool to find the best stocks for Cash Flow
In this video tutorial, Coach Matt goes through the latest edition of the Options Research Spreadsheet explaining how to use it to find the best stocks to cash flow.
Options 101: How to Add a Protective Put to A Covered Call
In this video, Tackle Trading’s Coach Tim explains when, how, and why a trader would buy a put option on a covered call position.
Tales of a Technician: Quell your Unfounded Assignment Fears
The assignment hobgoblin has been haunting the dreams of novice traders since the dawn of the options market.
Options 101: How to protect against earnings risk
In this video, Coach Matt shows new traders how to protect against the earnings risk and still cash flow with the covered call.
Trade Journal Series: How to use the Theta Research to find Covered Call candidates
In this video tutorial, Coach Tim Justice teaches how to find the best candidates to trade the Covered Call options strategy using the Theta Research tool.
Tales of a Technician: Delta Limits
“On Delta trading, what would be a reasonable delta limit for my portfolio?” Let’s hop to it.
Women In Trading: Options – My new love language
Let us talk options basics. Let me try to help you make sense of it all.
Options Theory: Long Calls
The long call is a seductive chap. Today kicks off the first in a multi-part series on options strategies.
Options Theory: Naked Put Basics
Today we turn to a popular cash flow strategy: the Naked Put. Come learn the basics.
Options Theory: The Protective Put
The options realm is an insurance marketplace where stock owners can acquire protection against loss in their beloved equities.
Options Theory: Delta, the Great Equalizer
I love the options greeks for many reasons. One will be on full display today. Delta is a multi-faceted metric used by traders a variety of ways. Perhaps one of my favorites is to use it as an equalizer.
Options Greeks Guide Part 2: What Is The Black-Scholes Model
What is the Black-Scholes Model and how to use it in your trading? This is what this video will cover.
Options Greeks Guide Part 3: What Is Delta
Delta is the most famous options Greek. Come learn what Delta is and how it can help you become a better trader.
Options Greeks Guide Part 4: What Is Theta
To professional traders, Theta means CASH FLOW and PASSIVE INCOME. Come learn more about this powerful option Greek and how it can benefit your trading skills.
Options Greeks Guide Part 5: What Is Vega
How does Vega work? What is the correlation between Vega and volatility? How does it affect options premium? That is what you will learn in this video.
Options Greeks Guide Part 6: What Is Gamma
What is the correlation between Gamma and Delta and how does that impact your trading business? Learn more about this underrated option Greek in this video.
Options Greeks Guide Part 7: What Is Rho
What is Rho? How does Rho affect options premium? This is what you will learn in the latest episode of this Options Greeks video series.
Options Theory: What is Implied Volatility Rank?
In this week’s video, I’ll show you how to understand Implied Volatility (IV) and Implied Volatility Rank (IV Rank).
Tackle Today: Call Options
Call Options is all about leverage and limited liability. Read further.
Tackle Today: Options Greeks Webinar
Mark your calendars for Monday, Feb 28th. On our YouTube Channel at 8:30 PM EST, I’ll be hosting a webinar titled Options Greeks for Beginners.
Tackle Today: Delta is for Direction
Delta might be the most fascinating Greek for the simple fact that it is multi-dimensional.
Tackle Today: Delta Brings Precision to Probability
Delta measures the probability of an option expiring in-the-money.
Tackle Today: Theta & Time Decay
Theta measures how much an option loses in value per day.
Tackle Today: Vega & Volatility
Volatility plays a significant role in options pricing. Read further.
Tackle Today: Gamma & Velocity
As a final message to prepare you to tonight’s webinar, let’s talk about option greek gamma.
The Options Heuristic Series [Free Content]
How can we explain the basics of Options so that our students can really learn, without getting confused with so many concepts, terminologies, and strategies? That’s the idea behind the series.
Options Greeks Guide [Free Content]
The Options Greek Guide is a simple, powerful resource to help you better understand how to use the Greek’s.
As you build, enter, and manage Options Trades, it’s helpful to understand the math behind the Black Scholes Option Pricing Model. Using the Options Greek Guide will give you the information and training on how time, volatility and asset price changes impact options values.
Options 101 Course [Premium Content]
The Options 101 Course is exclusive to PRO members. Try it for free for 15 days by clicking on the button below.
Options Report [Premium Content]
The Options Report is a weekly briefing delivered to Pro members of Tackle Trading. In this report, you will receive information and education that will help you develop as a trader. We will also highlight attractive trade setups for the coming week that you can add to your watchlist.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
13 Replies to “Tales of a Technician: Low Vol + Skew = Bear Put Paradise”
You speak to my concerns and instinct. Well done once again Tyler! Bear Puts here I come . . .
Ah yes! Frankly, I had no idea… but now I do. Thank you Tyler. This goes in my playbook now. Much appreciated.
Thanks for the insight Tyler. Will paper trade this one and follow it through to see how we do on this one.
This was new….thanks Tyler.
Thank you.
Tyler, I got one question:
What would be the best DTE setup for this debit spread trade?
I mean, I have a long-term protective put on SPY, securing my whole portfolio (paper account): 5 contracts of the JAN 17 180 puts (289 DTE).
Will it be a good play to sell 5 of the 175 puts to form a long-term bear put spread? Or does it only work well on the short-term?
Thanks in advance. I’m your fan.
We usually teach using about three months to give yourself plenty of time for the drop to materialize. If I were using the Bear Put for long-term portfolio protection I would do a wider spread than $5. So maybe a 180/165 or 180/160 or even wider. I wrote an article on March 2nd titled The Trick for Financing Portfolio Protection that fleshes out the idea. Go take a look.
Thanks for the synopsis on skew at the end of the article, and for some actionable ideas. I would love to learn more about skew “Tylerized.” Thanks for always keeping things digestible.
Mmmm… “Tylerized” I like that. Will add to the to-do list.
You are adding a lot of value to Tackle Trading and continue to be a “Must Read”. Thank you!
Great advice!
So clear and helpful. I understand BPS in a way I never have. Thanks very much!
Comments are closed.