Monetising a put hedge in a vol spike

A specific play from the hedge-management drawer.

When vol spikes on the way down, one of the ways I monetise a put hedge is by selling a strike below it.

Here's the setup.

You own a put. The market's dropped. You're up on the position. The obvious move is to sell the whole thing and pocket the P&L.

The problem with that move is you probably still want some protection. Selling the put leaves you naked again exactly when the vol picture is telling you something's brewing.

Sell the strike below instead. Turn what you own into a put spread.

Three things happen at once.

You bring premium into the book. You keep protection all the way down to that lower strike. And the put you just sold is the one that evaporates first on a bounce, which means you can buy it back cheap and go back to owning the outright when vol calms down.

What makes the trade work is the vol spike itself.

The lower strike gets juicy in a way it wasn't yesterday. Rich enough to be worth selling. And rich for the specific reason that it's set up to shrink fast on the first bounce.

The bigger point about vol spikes.

When vol expands, someone is paying you more to sell it than they were before. If you're already sitting on the long side of the trade, that's an invitation to hand some of it back at a better price. The hedge you put on cheap allows you to lean into the vol spike and use it to your advantage whilst still remaining reasonably protected.

How to read a vol spike from inside a hedge, and what to do about it, is one of the specific plays I cover in my framework. When to sell the vol you've suddenly been handed. When to keep it. What structures let you do both without giving up the protection.

Part of my framework is revealed in my 60 minutes masterclass, linked below.

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If you want to skip the masterclass and jump straight into our course, the Options Insight Advantage, this is the link.

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