Naked puts in a high volatility market feel like the obvious trade. Here is the math that destroys that idea.
| | Every time a market like this starts rolling over, I get the same question. | Why not just buy puts? | Markets are falling. Puts make money when stocks go down. Seems obvious. It is not. | When implied volatility is sitting at 50 to 60 percent, the premium you pay for any option is enormous. | Implied volatility is the options market's measure of expected movement. High IV means the market is pricing in big moves. That premium gets baked into every option you buy and works against you from the moment the trade is placed. | Here is the number that changes everything. At 60% implied volatility, if you buy a naked put or call, you have to be right on direction between 65 and 75 percent of the time just to break even. | Not to make money. To break even. | A naked option means buying a single put or call with no other position to offset it. Full premium. Full volatility drag. Full exposure to being right on direction and still losing. | Here is what that looks like. You see a stock rolling over. You buy the put. | The stock drops exactly as you predicted. You are right on direction. And you still lose money because the volatility crushed the premium out of your position faster than the stock moved. | This is happening to traders every single session in this market. | The fix is a spread. A vertical spread means you buy one option and sell another at a different strike. | The sold option offsets the cost of the bought option and, more importantly, it offsets the volatility drag. Instead of fighting 60% implied volatility, you are collecting part of it. | Broadcom was sitting at a level the expected move identified before the session started. I built a Superfly butterfly around that level overnight. | A Superfly butterfly is a three-leg zero DTE options structure. | Zero DTE means the options expire the same day. Except I trade them in the traditional sense. | You buy one option at a higher strike, sell two at the center strike, and buy one at a lower strike. The trade pays maximum when price lands near that center strike at expiration. | The overnight move did exactly what the expected move said it would. I closed the trade for 260%. | Not because I predicted Broadcom. Because the structure matched the conditions and the vol was working for me instead of against me. | This is the distinction that matters. Naked options fight the volatility. Spreads use it. | The traders getting destroyed right now are paying full premium in names running 50 to 60% implied volatility. They are right on direction half the time and still losing money. | Check the implied volatility before you place any trade. If it is above 40%, a naked option is working against you from the moment you buy it. | You do not need to stop trading. You need to stop buying naked options. | To your success, | Don Kaufman | P.S. The next time you want to buy a put in this market, pull up the implied volatility first. If it is above 40%, sell a lower strike against it. That one move changes which side of the math you are on. There's a better way to trade, it's called Superfly. | |
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