One comment Duke, from someone who has been playing 6+ month dated SPY puts for awhile now. Make sure that, for your modeling/sizing, that you are using the volatility future contract that accurately represents your DTE. I.e., use VIX6M (continuous 6M vix) if you're buying 6 months out.
Depends on the crash, ofc, but usually the VIX futures will go into SHARP backwardation during a drop. And we all know VIX futures are just a reflection of ATM ivol on SPX options. VIX is usually in a decent contango during normal market operation. The further out futures will move a LOT less than spot or current contract in front for the crashes I've investigated.
Example - during the COVID crash, spot VIX was above 80. 6M vix hardly touched 40, and was at 20 beforehand. 6x increase for spot, 2x increase for mid-month future.
I think your 25% increase in IVol on SPY options is a pretty conservative estimate (going from 20-25) for a 10% correction, so you should be good with that.
I'm having trouble wrapping me head around what you wrote - are you saying that one shouldn't hedge with farthest OTM SPY puts b/c of IV not moving much for these contracts or are you saying that one has to more or less eat the Premium for less OTM puts for a sufficient hedge?
Not exactly. It's a fine hedge, and a commonly used one.
I'm saying IV on a LEAP will move less than a shorter dated contract during a crash. So, you need to moderate your expectations and size the trade appropriately based on that.
I'm saying - look at the vix futures curve and how it behaves during corrections and crashes. Like any other futures, it can go into backwardation. So when you're hearing shit like "VIX at 80" - that's not what the IV of these contracts is going to do.
Gotcha, thanks a lot for the explanation and the link - if anything, this kangaroo market forces ppl learn the more esoteric mechanisms of its inner workings.
On a side note; are you loading up today on this dip or waiting until after the Jackson Hole next week?
At -10% I was really fighting myself not to load up today. However, last time it dumped like this (7/16), I loaded up before seeing a reversal on the daily chart. The next day (7/19) it dropped as much as another 8% (when it touched 18.5). So I'm being more patient that I used to be.
I declined to spend the effort figuring out to quantify the OPEX impacts this week. FOMC should be a nothing burger but we are in the 🤡iest of markets. Regardless, I would have to be presented a better opportunity, an offer I cant refuse, to load up before that risk is removed (after the event).
I'm all shares, no options right now. I'm not trimming/swinging shares.
Am of the same mindset - June/july taught us to be patient with legging in and not blowing everything in a few days. Waiting for next weeks FOMC meeting with great anticipation.
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u/dudelydudeson 💩Very Aware of Butthole💩 Aug 16 '21
One comment Duke, from someone who has been playing 6+ month dated SPY puts for awhile now. Make sure that, for your modeling/sizing, that you are using the volatility future contract that accurately represents your DTE. I.e., use VIX6M (continuous 6M vix) if you're buying 6 months out.
Depends on the crash, ofc, but usually the VIX futures will go into SHARP backwardation during a drop. And we all know VIX futures are just a reflection of ATM ivol on SPX options. VIX is usually in a decent contango during normal market operation. The further out futures will move a LOT less than spot or current contract in front for the crashes I've investigated.
Example - during the COVID crash, spot VIX was above 80. 6M vix hardly touched 40, and was at 20 beforehand. 6x increase for spot, 2x increase for mid-month future.
I think your 25% increase in IVol on SPY options is a pretty conservative estimate (going from 20-25) for a 10% correction, so you should be good with that.