A “New” Strategy – Just In Case The Market Collapses (Preview)

By Lawrence G. McMillan

As we have shown, there is a massive number of overbought put-call charts and just a general level of extreme speculation in the current market.  In late 2017 and 2019, conditions were similar and they persisted into February before the market collapsed.  The market is rarely so accommodating as to keep repeating itself, so while I definitely feel that a major correction could occur, I would expect our indicators to get ahead of that.  But just in case something comes out of the blue, this strategy is designed to generate large gains in a collapsing market, at only a small cost if that does not happen.

To do this, we are going to use a SPY put backspread – buy 2 puts at a lower strike and sell 1 put at a higher strike.  This is not a theoretically favorable position because we are buying puts with a higher implied volatility than the implied volatility of the one we are selling.  However, since there is an extra long put, it could pay off handsomely in a large market decline.  Moreover, this put spread starts to make money if SPY falls below 330 by the end of the year or below 317 by January expiration (see the accompanying profit graph above)...

Read the full article, published on 12/4/2020, by subscribing to The Option Strategist Newsletter now. Existing subscribers can access the article here.