Back Derivatives Strategy

Consider April Put Spread Collar Hedges Now That Volatility Has Gotten Very Expensive

Published on March 9, 2025

Jeff Jacobson

We saw another volatile week with both the SPX (SPY) and Nasdaq (QQQ) declining by more than 3% each (with both down as much as 5% before the Friday reversal). QQQ closed just below the 200-day moving average (its first close below since March 2023), while SPY was able to hold the 200-day on a closing basis (for now). The VIX closed sharply higher for the 3^rd week in a row (closing around 23.4), while hitting 26 on both the Tuesday and Friday selloffs before moving back lower. While I do believe both SPY and QQQ can continue to move lower over the next month or two, the setup to outright own vol (puts/put spreads) here is nowhere as attractive as it was when I advocated owning “cheaper” hedges in previous weeks (at higher market levels). As I mentioned above, VIX closed the week ~ 23.4, its highest weekly close since the August carry trade selloff and 60% higher than where it closed just three weeks ago. In addition, both SPY and QQQ are the most “oversold” they have also been since the August lows. The combination of expensive insurance and potential for a further oversold bounce makes owning outright hedges (especially just long puts) an unattractive proposition in my opinion. Even put spreads for both look less attractive as 10-delta/40-delta put skew for both SPY and QQQ is at 6-month lows when looking at 2-month (April) skew.

VIX index higher for the 3^rd straight week and just below the Dec highs. The only other time it was higher recently was the August carry trade spike

SPY April 10-delta/40-delta put skew at 6-month lows (bottom chart). QQQ has a similar put skew profile

So what’s the best way to hedge a large cap portfolio now that stocks are oversold and option vol is still near 6-month highs? I would now consider put spread collars for both SPY and QQQ if looking to tactically add hedges (especially on further bounces). With VIX closing the week at a 6-month high, upside call vol for both SPY and QQQ is also at the highs. Looking at April 25-delta call vol for both, we see that the only time it was higher recently was the August carry trade move. We typically see upside call vol drop sharply if/when we see markets stabilize and move back higher (which also supports selling them as part of a collar trade). Given how technical the market has become, I would suggest selling an upside call for both at the level they broke down from to help finance the downside protective put spread out to April.

2-month (April) 25-delta call vol for both QQQ and SPY at highest levels since the August vol move. Why I suggest selling these “expensive” calls to help finance protective put spread

Here are examples of trades I would consider for both (preferably at higher levels). Please contact me or the sales desk for updated pricing and/or execution capabilities on either trade:

Trade #1 – QQQ April put spread collar

Sell QQQ April 520 call

Buy QQQ April 480/425 put spread
Costs ~ $4.50 (QQQ 491.80 ref)

Selling the 5.7% upside call to buy the protective put spread that starts 2.4% below spot and is capped to the downside at the Aug lows
The 520 strike is where the August uptrend broke down and the 480 long put is just below the Friday lows
Option vol is EXPENSIVE. Selling the upside call and the downside put covers 60% of the cost of buying the closer to the money April put
Trade has a 50-delta, and overall structure is theta positive to start (key when vol is this expensive)
I would expect that upside call vol to contract sharply should we see market stabilize and/or start to move back higher
Structure would be cheaper if we continue to bounce to start the week

QQQ – like selling the 520 call (should be resistance) to own the wide put spread that starts just below the Friday lows and is capped at the August lows

Trade #2 – SPY April put spread collar

Sell SPY April 600 call

Buy SPY April 565/510 put spread
Costs ~ $4 (SPY 575.92 ref)

Selling the 4.5% upside call (after 3/21 ex-div) to buy the protective put spread that starts 1.6% below spot and is capped to the downside at the Aug lows
The 600 strike is just above where the August uptrend broke down and the 465 long put is just below the Friday lows and would also mark a break below the 200-day
Selling the upside call and the downside put covers more than 60% of the cost of buying the very close to the money April put (SPY basically hit that level on the Friday lows)
Trade has a 52-delta, and overall structure is theta positive to start (key when vol is this expensive)
I would expect that upside call vol to contract sharply should we see market stabilize and/or start to move back higher
Structure would be cheaper if we continue to bounce to start the week

SPY – like selling the 600 strike call (also should be resistance) to own the wide put spread that starts just below the Friday lows and is capped at the August lows as well

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