One explanation is that the deeper out-of-the-money put (which remains out-of-the-money) benefits from both a fall in the underlying security and an increase in VIX. The shallower out-of-the-money put (which became in-the-money as a result of the market drop) benefits from the former, but not so much from the latter. Maybe another way to explain it is that the deeper out-of-the-money put was more mispriced to begin with.
Not 100% on this but I suspect the in the money puts start to be dominated by the inherent value so you have to pay for that in the money portion of the option price. The out of the money put is pure volatility.
Why are deeper out-of-the-money puts better here? Have been scratching my head at this one for a while, but haven’t been able to figure it out.
One explanation is that the deeper out-of-the-money put (which remains out-of-the-money) benefits from both a fall in the underlying security and an increase in VIX. The shallower out-of-the-money put (which became in-the-money as a result of the market drop) benefits from the former, but not so much from the latter. Maybe another way to explain it is that the deeper out-of-the-money put was more mispriced to begin with.
For a given dollar notiional investment, you are buying more vega with deeper OTM puts (or just more contracts).
Basically the same as why getting things correct on 10 20-to-1 bets pays more than getting a 1-to-1 (even odds) bet.
Not 100% on this but I suspect the in the money puts start to be dominated by the inherent value so you have to pay for that in the money portion of the option price. The out of the money put is pure volatility.