Samwise Quick Reference Handbook
To streamline our daily blogs and conserve space, we’ve organized key resources into a convenient, collapsible dropdown menu below. A sort of Quick Reference Handbook if you will -- as our friends in aviation might call it. By clicking the menu below, you’ll have qu...
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I see no trade alert or new entry in trades for Tesla where was this posted?
If you look into yesterday’s article, it was mentioned at 3:50PM that there will be No Trades in Tesla. What Sam mentioning here is he will make a Trade in future based on his recent learning.
Hi Humberto — Masalapapad is right. We didn’t end up making the trade. We were exploring different options-based short-term trades. But it was too volatile and with too much near-term external risks to trade it with options.
Next time we’re in the same or similar set-up, what we’ll do is trade it with common stock. It was worth a common stock trade at 275 for the rebound up to $300. It ended up rebounding as expected. And now it’s back into uncertainty.
If it pulls back toward the mid-$200’s again, we’ll probably explore a position. More intermediate-term than short-term though.
Are you planning on starting a new portfolio in the next correction? If so, any thoughts on buying puts before the correction if QQQ gets up to 540$ or 560$?
Yes we are. The problem with buying puts ahead of time is that we’ve seen rallies go for much much longer than expected.
Outlier situations happen all the time it seems. For example, the rally that went for 36% over 100 sessions back in early 2023 was an outlier situation. Before that, we had never seen a rally go for more than 30%. And even then, it was almost always melt-up rallies.
AT the time, one could have made an argument to buy puts at day 70 and on 28%. Those puts would have absolutely deteriorated.
So it’s really tricky. If you go in buying puts to start, there’s a huge risk to the portfolio to start off. Remember, these hedges often makeup around 7-12% of the portfolio. So you can end up with a big ding to start if not done correctly.
I think in order for us to consider something like that, we’d need to see an outlier happen first. For example, if the QQQ were to continue moving higher up to $580 or $600, then we might consider buying puts ahead of time.
But even then, at the bottom of the correction, it would be time to close out the trade anyway. So it would basically be a trade.
If a correction occurs and we’re oversold on the daily and we have all of the other triggers, we’d be closing out the hedge.
In that scenario, what we’d probably do is close out the hedge, buy the long positions and then opt for a cheaper short-term hedge to reduce hedging costs. Then one a fully rally has occurred, we purchase more long-term puts.
I’ve toyed with altering the strategy lightly so that we buy ultra near-term options to hedge the risk between the bottom and the first 15% return off the lows. Normally, we just go long at deeply oversold and then simply wait for the rally to hedge.
Under the current circumstances with the market having recently sustained a 25% correction, given high valuations, tariff uncertainty, it might make sense to launch a portfolio and immediately hedge near-term downside.
For example, imagine we’re in a correction right now. The QQQ peaked at $600 a share and has fallen to $531 today. The $NYMO pushed overbought. The $VIX is deeply overbought. The QQQ daily & hourly RSI are both deeply oversold. So we have all the evidence of a bottom. The QQQ is down now 11.7%. We go long by purchasing the June 2027 $530 calls (just in the money).
Now we can hedge the downside with relatively inexpensive options to protect against the potential for a major slide. The July 18, $520-$510 put-spread expiring a mere 5-weeks from now (25-sessions) only costs $2.30. That spread at expiration is worth $10.00. If we bought $55,000 worth of the June 2027 $530 QQQ calls at $88.54 per contract, we’d be able to buy 6 contracts. Now suppose the QQQ were to fall to $450 a share (another 80-points) in what was a much larger sell-off. The June 2027 $530’s would fall 40-45% to $48 a contract. We’d take a $24,000 short-term drawdown to our long position.
The July $520-$510 put-spread would be deeply in teh money and likely be trading at $9.00 per contract at the lows. If we bought 24 contracts ($5k worth), that $5k would produce a $16,600 return esseitlly. It would off-set 66% of the drawdown. And it would only cost us $5,000 (5% portfolio assets) to hedge it. We can make back that $5k very easily on a rally. We’d be able to close out the entire trade at $21,600 and use the capital to DOUBLE our entirely position from 6 contracts to close to 12 contracts.
So we’re going to look into doing it this way.
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Now here’s where buying puts ahead of time might enter into the equation. Not in the way you might think. Rather than simply just buying the puts as a way to create a continuous hedge, what we could consider doing is launching the portfolio, buying a 10% put position with the goal of closing that out for a 50% return a correction. If the puts we buy go up 50%, then we make $5,000 (assuming a $10k position on a $100k portfolio). That $5,000 will then pay for the near-term hedge when we go long. We’ll buy a put-spread to protect the first 20-30 days of the rally. We just want to protect the space between when we go long and when we buy legitimate long-term protection (1-year protection).
And that’s how buying puts ahead of a correction could work for us. But as I mentioned earlier, there’s a ton of risk involved. It could backfire and we could easily see ourselves closing out with a $3-5k loss or something. So there’s pros and cons to doing it like this.
IN teh last correction, what we did instead — to protect ourselves — was to buy half of our long position only. We didn’t get a correction we were happy with and so we only bought a 50% long position in stark and hedged that position. Stark was down something like 30-40% at its worst. Though I never for even a moment had any concern at all for stark because I knew with the QQQ down 20-25%, we were going to make a killing on the long trade once the QQQ bottomed. Stark is now green 28%. And when you think about it, Stark launched during a small 8% correction and had to weather a full blown 25% crash. It still came out on top. Meaning, the strategy we already employ does exactly what it’s meant to do.
The hedges we bought in stark worked well and so that’s a true and tried method of approaching things — going only half long when we’re not happy with size, scope and/or indicators of a correction. It paid off being worried about that.
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Finally, it’s worth noting that buying a $5k put-spread to hedge a $55k long position in the Jun $530 puts after a 70-point correction from $600 to $530 wouldn’t ding our profits much if at all. For example, if right after buying the July $510-$530 put-spread in this hypothetical situation, the QQQ just takes off as it has after every other bottom, we’d end up with an immediate $30k return or 60% gains on the calls. And that’s on a mere 12% rally. Most rallies go for 20%. We’d lose $5k on the put-spread and would quickly make that back by selling covered calls against our position. We’d then have to pay for new puts.
So that’s one way to approach the next correction. We won’t buy puts ahead of time unless the QQQ goes into deep outlier mode first. But it’s something we might do. 10% put positon in a new portfolio.
Thanks a lot! Everything you said makes perfect sense!
Hi Sam,
We purchased our March $400 QQQ puts when the IV was at a specific level. Since then the IV has decreased as we’ve recovered through this intermediate term rally.
Let’s say I want to perform calculations to craft an effective hedge on an ETF / stock or see the contract value of existing hedges during a correction due to the sharp increase in IV. I use https://optionstrat.com/ for options related P/L calculations and one of the input parameters is the IV. Is there a way to see the IV for specific ETFs / stocks over time to get an idea of what we might expect the IV to be during the upcoming correction? For example, maybe analyzing the average IV over past corrections.
Thanks!
I’m sure there is data out there already that answers this specific question. You can probably find what the average IV is for QQQ options during corrections. In fact, I’m sure if you take the $VXN plug it into chatGPT, they’d give you an answer on that. But I don’t think it’s that important to be honest.
Personally, I don’t ever get that specific to hedge. I just take basic assumptions and spend time on the core analysis. It could impractically time consuming to get that specific when hedging and often you won’t get the right answer anyway as you have to make so many different assumptions.
It’s really unnecessary. It’s more important to model out different hypothetical situations based on known support/resistance levels, correction sizes, probabilities of different scenarios playing out, days remaining until expiration and then picking a strike and expiration based on those different likely outcomes.
For example, when we bought the March $400 puts, we were only focused on (1) what happens if the QQQ sustains a 2nd leg lower. What is likely to happen? Double-bottom? breakdown to $350? What is the likely downside target? How much would the March $400 puts be worth in such a situation (a crash back down to $400, $350, $300 etc.) and what would the leaps we purchased be worth. Is the hedge effective in protecting against such a scenario?
(2) What happens to the March puts in a rally back to the highs? If the QQQ rallies back to the highs in the coming 2-4 months (from date of purchase), peaks and sustains another correction, how much protection is still offered by the March $400 puts? Would $450’s be better or is too expense? Would be cheaper to buy $350/$360/$380’s or would they not offer enough protection down the line? Are the $400’s most effective long-term with the market working with much higher future potentially peak prices in the future? Meaning, suppose the QQQ rallies 30-40% off of its lows, peaks and then sustains a correction, what protective value do the march puts have at $350,$400 and $450 and how do we balance price with probability.
Notice that even now after a 32% rally, the March $400 puts still offer significant protection in a crash scenario. Especially when taken together with the premium sales we recently made. We beared that out a few days back and we’re really well insulated with the premium sales + March puts.
Even without buying the June 2026 $500 puts up here at $530-$540, even without that, our march puts would still very much protect the portfolio well enough when taken together with the premium sales we made.
Different situations call for different hedges and different distances for strikes. It’s not just a simple x-strike would give us the maximum impact based on different greeks. When you’re trying to figure out what a put is likely to be worth in a future correction, I simply add a small amount of extra IV. Base assumption. Anything about that is just gravy. I make sure we’re protected even without the increased in IV. That’s the key.
Of course there is always going to be a very specific option out there that will give the maximum bang for your buck. The problem with that, however, is it require an enormous amount of analysis that doesn’t even often take into account the varying probability of different sized correction and from which peaks. There are too many unknown variables to try and nail that down. Because it’s different based on different correction sizes and in different scenarios. The best possible option shifts based on what actually plays out.
For example, we want to buy the June 2026 $500 puts and want to buy them at $540. That means the strike is only 7.4% away from the proposed peak price of $540. When we bought the $400 puts, we did so when the QQQ was trading around $470 or a full 14.9% (nearly double the distance) as the puts we’re buying.
And a large part of that difference has to do with the fact that we see less upside from where we are now and we want to protect for much longer distances of time. Also, the risk of a 2nd leg down was high but so was the upside. Meaning at $470, there was $70 of upside. Right now, we see 30 at best. $560 at best from here.
Also, when we bought the march puts, it was absolutely necessary. It doesn’t how high the IV was at the time. We absolutely had to buy those puts with the QQQ having met major resistance at $470, with the size of the correction that had occurred (25%), the various risk to the economy at the time and the probability for a second leg down. We were unhedged and had to reduce risk.
Here, we already here protection but merely want to trade it out. The $400’s did their job from $470 up to $540. We produce the returns we needed and now we need to trade up for longevity.
If the QQQ sustains a 12% correction from $540 down to $475 and then rallies to $600, we want our $500 puts to continue to maintain protective value in a later correction down the line. The $500 puts do that. The QQQ can technically rise to $650 and they’d still have protective value.
That’s what buying the $500’s is mostly about. We essentially want to trade out the $400’s for the $500’s to offer us protection on the next level up.
So we don’t get into which puts offers the best maximum protection right here at $540. We’re thinking of different future scenarios playing out. We’re not just concerned with protecting against a crash potentially right now, but one happening down the line after a big rally.
Also, buying the $500’s is partly about capitalizing on the potential downside since we have the space to do that. We can afford it. With the QQQ having rallied 32%, it is at the extreme high end of the spectrum as rallies are concerned. So there’s high probability for a correction happening here. And if not from here, from somewhere in teh $500’s. And I’m willing to to wager that if the $500 puts are bought at $540, they will produce an eventual profit in some eventual correction even if we’re wrong on timing. Meaning, supose we buy at $540 and the QQQ rallies up to $600. At that point, it probably crashes to $500 to test suppose anyway giving us gains eventually.
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Anyway, the point here is that you can probably find an average IV in corrections. But I often just add a small increase volatility when modeling for conservatism. I often just use the volatility we have now as a way to illustrate the hedge would for sure be effective. because if it’s effective in the current environment, it’s going to be even more effective in a crash.