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Why Put Buying Can Be Dangerous During Periods of High Volatility

by | Nov 18, 2022

A quick head’s-up before we dive into the fallout from the crypto mess — Jeff Z and I are taking a week off from Crush the Open this Monday because of the holiday-shortened week. 

Of course, my team and I will still keep track of our open positions and new opportunities, but I don’t expect much in the way of fireworks with so many big-money traders away from their desks.

Like I mentioned in Thursday’s Blitz Daily video, when markets aren’t trending in one direction to the other, it’s good to get outside, where our mouse buttons can’t get us in trouble.  

Have a great Thanksgiving and I hope you spend some quality time with your family, eating too much turkey and watching football — I know I will be!

With that out of the way, let’s get into it…

The past two weeks have been a nightmare for crypto names as more details from the FTX collapse make headlines.

It might be the biggest fraud in history… It’s certainly the biggest scam since they sent Bernie Madoff to the penalty box for 150 years — yes, he died in prison..

Now, if you’ve been following New Money Crew for any length of time, then you know I’ve been a crypto skeptic, especially the fringe alt-coins at the center of this mess… 

But no matter how much validation I feel from this whole situation, this story is far from over.

Make no mistake, there’s still plenty of pain to be felt and pits to fall in before all is said and done…

And just because these coins and some of these junk companies elbow-deep in the crypto scene are in danger of crashing further, it doesn’t mean making money is as simple as buying puts.

Crypto Crash: Put-Buying Isn’t a Silver Bullet

If options trading were as easy as picking the direction of a stock, a lot more of us would be on a warm, sunny beach right about now instead of staring at our computer screens.

There are several major factors that determine how much an option trades for, and the price of the underlying stock is only one of them.

Implied volatility (IV) — the amount the market thinks a stock price can move — is another critical part of options pricing and the market makers use it to their advantage.

IV spikes happen when big events drive the demand for options higher, sending the price traders pay up with it.

Most often, we see this around planned events like earnings, investor days or new product launches…

But those known catalysts aren’t the only reason IV can jump — when unforeseen events like what happened with FTX hit the tape, not only are the vultures running to the options to capture that move lower, but major shareholders will also buy puts as insurance to offset potential losses. 

Think of it like this — flood insurance is going to be a lot pricier for a beach house in the Florida Keys when a hurricane is headed right for it than if you’d bought it ahead of time — the increased demand and risk means market makers will charge bigger premiums for those downside bets.

Right now, implied volatility on stocks with cryptocurrency exposure like Coinbase Global Inc. (Nasdaq: COIN) or Marathon Digital Holdings Inc. (Nasdaq: MARA) is sky high, and so are the puts.

Coinbase Chart with Implied Volatility (Crypto Crash Put-Buying)

Wondering what those little arrows mean and how they can help improve your trading? Get the details here!

In order to make a return on those options, we would need another sharp drop in crypto, or the broader market.

Will that happen? I don’t have a crystal ball… But I do know we’d have to pay more than I’m willing to risk to find out.

The way I see it, when markets get crazy and everyone on TV and around the water cooler gets bearish, that’s when it’s time to stay nimble, trade small, follow the flow and look for stocks that have reason to move without help from the market — like earnings. 

Check out the clip up top and let’s talk about the crypto crash put buying, and some different setups that could improve our risk versus reward…

P.S. Don’t Buy or Sell Another Stock Without Seeing This First

I’m about to expose my favorite trading tool I’ve ever come across…

A tool that can be used by traders and investors of all skill levels… 

It’s something I think could influence retail trading in a big way!

And it has nothing to do with stock scanners, order flow, technicals, tech stocks, crypto or anything like that. 

In fact, it all boils down to a single indicator… 

And what this indicator is showing me is alarming…

Let Me Show You How to Use It…

WRITTEN BY<br>Lance Ippolito

Lance Ippolito

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