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Put Options are Painfully Expensive: Trump's Tariff Leads to Record Options Trading

Last Friday, Trump's unexpected tariff announcements led to a major market crash, shaking global financial markets. It was the worst week since the 2020 COVID crisis, with the $DJIA(.DJI)$    weekly down 7.86%, the $NASDAQ(.IXIC)$   dropping 10.02%, and the $S&P 500(.SPX)$   falling 9.08%. The $CBOE Volatility S&P 500 Index (.VIX.US)$ , a measure of market volatility, closed above 45, its highest since COVID.

The recent turmoil caused a spike in activity and volatility in the options market. On last Friday, the U.S. options market hit a record high of over 100 million contracts, 71% above this year's daily average of 58.4 million. This surpasses previous panic events like last year's Big Tech selloff, the 2023 regional bank crisis, the 2021 recession fears, and the 2020 COVID, highlighting the important role of options in turbulent times.

Put Options is Painfully Expensive Now

The rise in the VIX shows that expected market volatility is much higher. When the VIX is this high, it means traders expect big market swings soon. On Friday, trading volume in put options hit a record high of over 52 million, with the 25-Delta Put IV spread jumping to 13.4, similar to levels during last year's Big Tech selloff. 

The IV of .SPX surged to 44.89%, at its highest historical level. This suggests investors are rushing to protect their portfolios, causing put option premiums to soar. This makes it difficult for investors to hedge their positions because option premiums are very costly.

Even institutional hedgers are limiting purchases to broad index puts. Brent Kochuba from Spot Gamma said "No professional investor would buy puts now—it’s like paying for hurricane insurance during the storm."

2 Option Trading Suggestion in a Panic

1. Covered Call (Buy shares while selling long-dated calls)

Buying calls for a rebound is risky now. If the market rallies, volatility will collapse faster than prices recover. Instead, focus on high-quality stocks oversold in the panic.

HOW: Purchase shares of a stock or an ETF that you are bullish on or wish to hold in your portfolio. Simultaneously, sell call options against these shares with a strike price higher than the current market price and an expiration date several months or even years in the future (long-dated).

WHY: Selling call options generates premium income, which can enhance the overall return on your investment in the underlying shares. The premium received from selling the call provides a buffer against potential declines in the stock's price. While this strategy limits your upside potential (as you'll be obliged to sell the shares if the stock price exceeds the strike price), it is suitable for investors who are moderately bullish or neutral on the stock.

2. Buy short-term put spread

HOW: Buy a put option with a strike price that is close to the current market price of the underlying asset and sell a put option with a lower strike price, both with the same expiration date.

WHY: This strategy allows you to hedge against further downside risk at a reduced cost. By purchasing a near-the-money put, you gain downside protection if the asset continues to decline, while selling a lower-strike put offsets part of the premium paid, lowering the net cost of the hedge. The spread limits your maximum loss to the net premium paid (long put cost minus short put income), making it a defined-risk strategy. In a panic-driven market, short-term volatility often inflates option premiums. This approach is ideal for investors seeking cost-efficient protection or betting on a short-term decline without overexposing themselves to volatility crush or time decay.

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