Scanning Options for Tail Hedging

With VIX at it’s lowest point in a year (About 17 as of 1st April) , premiums from selling puts have seen significant decreases at the same expiry and % OTM level. Maintaining the same weekly profits requires going closer at the money or selling larger positions.

At the same time, hedges have become cheap, like buying puts back before the 2020 crash. When Boeing was at $300 in Feb 2020, their 1 year out $150 puts were $0.30. Puts still aren’t as cheap as Feb 2020 but it’s getting close.

Here’s a top 20 list of the cheapest May put options defined by Theta/Strike * 100. (Aka the yield on collateral if you do CSP).

These options are found by using our options scanner with the following parameters:

  • Puts only
  • Option Premium < 1% of strike
  • % OTM < 10%
  • Expiry: May 21st

Below are the results when ran on April 4th 2021.

For expiration, consider using one that’s 6 weeks to 2 months out, then roll at the 1 month mark.

After running the filters, head to the greeks tab and sort by the Theta Annual % column. Theta Annual % is the annualized yield on collateral if you do CSP, finding the smallest value means you’re paying the least in theta for the long put position.

If you find yourself increasing your buying power usage, like diving into VIAC and similarly affected stocks, consider looking into cheap puts with a fraction of your collected premium for hedging. Make sure you can never get wiped out on a -30% crash.

Cheap puts on lower IV stocks can pay out higher during market crashes. Eg a 10% OTM monthly put for a boomer stock can cost 1/5-1/10 a high IV tech stock. Even if it crashes by half as much, it can pay out more than the equally OTM put on a high IV tech stock.

From the list above, do also remove SPACs because of their $10 floor, and any other stocks that you’re confident won’t drop due to merger at a higher price or other reasons. Filtering low volume or liquidity options is optional. While it might help when you roll the options, if any market dips or black swans occur, there will be no problem selling these options off at many times their current value.