If long puts are "cheap" at market tops, that screams "don't short the underlying, buy the put", right?
The word "cheap" should be replaced with "balanced" - there is no free lunch. But I think you'll be satisfied with how Puts act.
Problem is that market can top and may take much longer to drop than your expiration date has. Then you have the problem of the market having to drop enough below your strike price to make a profit.
I will take the other side of this trade. I think puts are much tougher to trade on the long side then calls provided there is a put skew and there usually is. OTM puts are almost always overvalued broadly speaking because they are bought for "protection" where as calls are usually bought for speculation. I find it much easier to be long calls since they usually are discounted relative to the puts equidistant to the ATM strike. I also find the downside in equities in general to be a lousy bet. Stocks go up. That's what they do. Don't get mad at me, they are inflationary assets. Since they lean to the upside, I find it far easier to go in that direction rather then bet on the "rare" times they go down. Just my opinion of course.
Maverick, is there a VIX level where you wouldn't buy calls because the implied volatility is too expensive (thus the rise in price would not sufficiently offset the volatility crunch)? Thanks in advance.
Volatility is relative. So a high VIX means nothing in a vacuum. For example, when the VIX is high, stocks tend to move more to the upside then when the VIX is low. So what you want to ask yourself, not is the VIX high, but is the VIX high relative to the current realized vol in the actual stock. Some of the biggest moves in stocks actually come when the VIX is rich because it's usually after stocks are beaten down and when they squeeze, you get magnificent moves to the upside. Everything in trading is relative.
Eh, it was your link and the language they used. Maverick, I trend trade part of my portfolio, typically looking for monthly prints to cross the 10-month SMA. It gets me short for most of the big drops. When the peak has passed but the trend is clearly down, have the puts typically already been bid up?
The puts are always bid up, they are insurance. The higher the stock goes, the steeper the skew. Now if you buy DITM puts, that's a different story. They are priced much more favorably then the OTM puts, so if you trade those, you'll probably be better off.
Reading through this thread (and elite trader forums in general), it would seem that the majority here are directional traders 1st and foremost. I myself started as a retail option trader learning that direction is secondary (or third...depending on who you ask). I use option strategies to play chess, not checkers, but to each there own. It boggles my mind to see the use of options in their most non-optimal form:eek:...interesting indeed. This is not to say directional trading does not work, I just suck at it personally, but I'm killing it on non-directional front.