Hypothetically speaking? [This is an example of a strategy for similar situations, not investment advice. I don’t know your financial situation, and I don’t know what the market will do. You are responsible for your own money.] If you’re expecting a crash, and vol is currently moderate, you could sell one near-the-money SPY put and use the money to buy three out-of-the-money VIX calls.
Choose the dates and strikes so that you get more premium from the put than you have to pay out for the three calls.
If you’re wrong about the crash and the market continues to go up or sideways, then all the options would expire worthless and you keep the excess premium.
If the market does crash hard, the VIX will also spike hard, and you should make much more on the three VIX calls than you lose on the one SPY put, although this can depend on exactly which strikes you choose. Gains could potentially be very large in this case. But you would need to close the position before VIX falls too much. VIX spikes don’t tend to last very long.
It is possible to lose some money on this spread if the market drops a just a little but not enough to push the VIX high enough to compensate. The put could then expire in the money, while the calls expire worthless. But since the market only dropped a little, your loss shouldn’t be too bad.
If your put is cash-covered, this isn’t much riskier than holding SPY. But if you have the ability to sell naked puts, you should know what you are doing and not leverage too high. It’s possible that your broker could start to liquidate your portfolio during the crash, so watch out for margin calls.
Why not just buy a VIX call? Notice what happens if you’re wrong and the market goes up or sideways when you just buy the VIX call vs the spread.
Long options are the wrong side of risk. It’s a better deal in the long run to sell insurance than to buy lottery tickets, although it may not feel that way. But buying some reinsurance can be prudent.
Hypothetically speaking? [This is an example of a strategy for similar situations, not investment advice. I don’t know your financial situation, and I don’t know what the market will do. You are responsible for your own money.] If you’re expecting a crash, and vol is currently moderate, you could sell one near-the-money SPY put and use the money to buy three out-of-the-money VIX calls.
Choose the dates and strikes so that you get more premium from the put than you have to pay out for the three calls.
If you’re wrong about the crash and the market continues to go up or sideways, then all the options would expire worthless and you keep the excess premium.
If the market does crash hard, the VIX will also spike hard, and you should make much more on the three VIX calls than you lose on the one SPY put, although this can depend on exactly which strikes you choose. Gains could potentially be very large in this case. But you would need to close the position before VIX falls too much. VIX spikes don’t tend to last very long.
It is possible to lose some money on this spread if the market drops a just a little but not enough to push the VIX high enough to compensate. The put could then expire in the money, while the calls expire worthless. But since the market only dropped a little, your loss shouldn’t be too bad.
If your put is cash-covered, this isn’t much riskier than holding SPY. But if you have the ability to sell naked puts, you should know what you are doing and not leverage too high. It’s possible that your broker could start to liquidate your portfolio during the crash, so watch out for margin calls.
Why not just buy a VIX call? Notice what happens if you’re wrong and the market goes up or sideways when you just buy the VIX call vs the spread.
Long options are the wrong side of risk. It’s a better deal in the long run to sell insurance than to buy lottery tickets, although it may not feel that way. But buying some reinsurance can be prudent.