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2016issue C0627-28

Cash-secured puts under extreme implied volatility

In mid-April 2016 a distressed single-digit name was trading below fifty cents a share, and near-money option quotes showed implied-volatility readings described as among the highest seen on any listed option over a ten-year lookback. TradersWeek's editorial reading treats that window as a classroom for how solvency fear can lift option premium, so a cash-secured put is a funded, strike-defined bid against possible binary failure rather than a way around that failure.

  • In the mid-April 2016 observation the featured equity was trading below fifty cents a share, while a related long-stock position had been averaged in at five dollars a share.
  • Near-money option quotes showed implied-volatility readings described as among the highest seen on any listed option over a ten-year lookback, tied to still-pending scheduled reports and market speculation that the issuer could run out of cash.
  • Selling a put rather than buying one was framed as collecting option premium for a bullish obligation at a chosen strike, with the contract cheapening if the stock stayed at or above that strike until expiration.
  • The same short-put construction was characterized as still risky because the loss profile can outweigh the premium collected, and after that window the issuer entered bankruptcy on April 21, 2016.
Entries in this reading3 entries
Current trackCash-secured put15 readingsOption premium analysis103 readingsImplied volatility analysis176 readings

A distressed single-digit name

In the mid-April 2016 observation, the featured equity was a distressed single-digit name trading below fifty cents a share. A related long-stock position had been averaged in at five dollars a share.

Share volume was described as sitting at all-time highs as both bullish and bearish bets concentrated in the name.

Extreme implied volatility

Near-money option quotes on that name showed implied-volatility readings described as among the highest seen on any listed option over a ten-year lookback. Implied volatility is the options market's priced expectation of how far the underlying may move over the remaining life of the contract, compacting fear and greed into a single reading.

The implied-volatility spike was tied to still-pending scheduled reports and market speculation that the issuer could run out of cash. A near-money strike sits close to the current share price, where premium and implied-volatility readings are most sensitive to a binary outcome.

Collecting premium at a chosen strike

Selling a put rather than buying one was framed as collecting option premium for a bullish obligation at a chosen strike. Option premium is the price paid or received for an option; a short put collects that price up front, and the contract cheapens if the underlying stays at or above the sold strike through expiration.

SunEdison 7–30 day at-the-money implied volatility, November 2015–April 2016

While SunEdison fell from the high single digits toward a 43-cent last print, 7–30 day at-the-money implied volatility mostly held in a 115–230 percent band through the first two crashes, then re-rated above 500 percent in the final sessions as the shares went sub-dollar. The points were read off the red IV series on the published daily chart, not from a numeric table, so the levels are approximate.
While SunEdison fell from the high single digits toward a 43-cent last print, 7–30 day at-the-money implied volatility mostly held in a 115–230 percent band through the first two crashes, then re-rated above 500 percent in the final sessions as the shares went sub-dollar. The points were read off the red IV series on the published daily chart, not from a numeric table, so the levels are approximate.SUNE · daily · 2015-11-06T00:00:00.000Z to 2016-04-01T00:00:00.000Z

Digitized from the raster. After the last labeled tick (21 March 2016) dates are placed from axis spacing; the final session is 1 April 2016, matching the chart header (earnings in 12 days, 13 April 2016 estimate) and 49 days to the 20 May 2016 expiry on the companion chain. Implied-volatility levels rounded to the nearest 5 points.

Risk after the window

The same short-put construction was characterized as still risky because the loss profile can outweigh the premium collected. After that mid-April window, the issuer entered bankruptcy on April 21, 2016.

An editorial classroom reading

TradersWeek's editorial reading treats this distressed, sub-dollar equity as a classroom for implied-volatility extremes. The same solvency fear that makes outright share ownership unattractive can inflate put prices.

On that editorial view, a cash-secured short put becomes a way to place a funded, strike-defined bid against a possible binary failure rather than a way around that failure.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
8 of 15 in the Cash-secured put track
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All readings on this track · 15 readings
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  2. 1990Covered-call overlays fail a flexibility test until restated as puts and spreads
  3. 2005Covered-call supply, cash-secured puts, and conversion fair value
  4. 2007Covered calls and cash-secured puts as one income regime
  5. 2007Cash-secured puts, assignment risk, and post-entry overlays
  6. 2012Accumulation risk: protective puts, cash-secured puts, and spreads
  7. 2016Cash-secured put income, assignment, and reward-to-risk
  8. 2016Cash-secured puts under extreme implied volatility
  9. 2016A gold ETF range regime as a short-call ceiling, put floor, and short strangle
  10. 2017Weekly cash-secured puts filtered by intraday stochastic bands
  11. 2018Far out-of-the-money cash-secured puts as income and entry
  12. 2018Weekly equal-weight downtrend as a shared gate for VIX premium and put collateral
  13. 2019Bounding naked premium after a volatility spike
  14. 2020Cash-secured puts in a 2020 implied-volatility spike
  15. 2020Cash-secured put as a crash-regime overlay
By fieldOptions and volatility435 readingsBy year2016134 readings
All 15 readings tagged Cash-secured put
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