Dan Passarelli, CEO - Market Taker Mentoring

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With the market having fallen over the past maybe about two weeks here now, really and seeing the VIX up at 25.87 to close the day today, fairly high number, that sort of begs the question: is right now a good time to be selling puts?

It's kind of a lot to unpack there, but let's talk about this now. A lot of people look at selling puts as a very risky strategy because you have limited profit potential and potentially really big downside risk if the market heads a lot lower. And in a market like this with some of the news that we're seeing, it's possible that the market could head a lot lower. It's possible that, well, maybe it doesn't.

That sort of begs the question here do we try and capitalize by selling some of the very rich premiums, meaning high iv, aka expensive, in some cases, overpriced, options and run the risk of the market really falling out of bed and losing a lot on those? So it's kind of a matter of perspective. Now, some folks hedged their S & P 500 positions or their portfolios using S & P options or even for that matter, bot puts the hedge in individual stocks and may have made some money on those hedges. Some people even sold out of some of their positions at higher prices.

Now, at some point it makes sense to scale back in. Look, over time, the market does go up. Even if we end up in a recession and it lasts a year, eventually the market trades higher than it does now, right? At least it has over the past couple of hundred years, right? So selling puts at very high premiums might make sense for people who want to start scaling back in.

If the stock or the S & P 500 doesn't fall and you end up keeping those rich premiums - great, then what traders would want to do is go back in and sell them again. And then at the time you finally get assigned, then you'd be holding shares of spiders or the individual stocks for the long haul. So getting back in if you've gotten out already could be something that makes sense. I've done that in the past rather successfully.

If you're fully invested in the market and you're riding out the storm, that might be a little bit of a more precarious scenario because that's a scenario in which you'd want to skate and not get assigned. Put credit spreads might make a little bit more sense. But we always want to make sure that we have something on our side, that we have some support, whether that's horizontal support connecting low prices like we have here. But this is way down at about 375 or maybe even here at about 390 or maybe if it's using some of the longer term moving averages. Now, yesterday we closed below the 50 day. And today we traded almost the entire day below the 50 day, and we confirmed we had a confirmation candle below the 50 day.

So I would be looking for a little bit more move to the downside before I would start selling put spreads myself. But then again, if you have a different way of looking at it, the important part of this conversation is that premiums are very rich right now, and that means that options are overpriced. They're ripe for selling as long as we don't run into trouble from a directional standpoint. I hope that helps.