The Game Plan to Approaching Options Conservatively
Surviving a >20% Crash, and Taking Advantage of High implied volatility
Let’s get straight to it, shall we? The VIX briefly touched 60%, a level not seen since 2020, 2008. Last year, we hit 65% during a thin-trading frenzy on the Yen carry trade. Today, there’s undeniable much more volume to this down move.
Clearly, there’s some indiscriminate selling going on right now. People looking to sell profitable positions as they’re facing margin calls and/or client redemptions.
What does it mean for our Portfolio? As of last Friday, our portfolio was down 0.31% since starting the Substack on December 17, 2024. That excludes the much improved P&L from the 1-year setups that benefit greatly from the recent spike in volatility (which we didn’t have as of March 31, when we shared our updated performance).
Including that, it’d be a positive P&L of around +0.34%. The small cap Russell-2000 index is down over 21%, as is the Nasdaq. That’s significant outperformance that allows to be more aggressive whenever we feel there are more directional shots to be taken. We still have plenty of positive time value in current to be earned, and we have some static positive delta that should help us benefit from a market rebound (whenever that may happen). If this environment of higher (not extremely high, but 20-22% VIX) implied volatility takes hold for the next months, it’ll be great for options premium sellers.
All in all, we reiterate what we’ve been saying in previous blogs and webinars: if you can manage to absorb a decline of 20% - 35% with a portfolio that’s down 0% or 5-7%, that takes out most of the risk of your entire investing career if you stick to this strategy:
scaling positions up and down based on implied volatility;
focusing on high-quality stocks you’d want to own directly or indirectly (i.e. having bullish exposure via a short put);
having some 1-year setups that smooth volatility risk when it appears to be lowest (i.e. low VIX being found normal)
As for today’s market environment and the question: when will things look better? We don’t know what’s gonna happen next, but the VIX tells it all.
If you have a VIX that’s stabilizing, people who’re still invested will reassess their portfolio, exposure to tariff-heavy/not so recession-proof names, and eventually rotate into long-term winners. If the VIX contracts more meaningfully, you might get a buy-the-dip mentality for beaten down stocks, while defensives would lag. In any case, until the VIX tops out, this frothy environment of margin calls will persist. It’s unlikely for the implied volatility index to keep going higher for another 5 days in a row, so at some point, heavy selling will dry up.