Know Your Options for Wednesday, May 20, 2026

Key Concepts

• VIX (Volatility Index): A measure of implied volatility for S&P 500 options over the next 30 days. It is not a tradable asset itself but can be accessed via VIX futures or related ETFs.
• Contango: A market condition where the futures price of a commodity or index is higher than the spot price, resulting in an upward-sloping futures curve.
• Time Value Decay (Theta): The process where an option’s extrinsic value decreases as it approaches expiration.
• Cash-Covered Put: A strategy where an investor sells a put option while holding enough cash to purchase the underlying stock if assigned.
• Rolling Options: The process of closing an existing position and opening a new one with a different expiration date or strike price to manage risk or extend a trade.
• Intrinsic Value: The difference between the stock price and the strike price of an option when it is "in the money."

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1. Hedging and Volatility Trading

Chris Thomas explains that while many investors hedge using put options on ETFs like the S&P 500, one can also hedge by trading volatility.

• The VIX Challenge: The VIX is a calculation, not a tangible asset. Investors must use ETFs (like VXX) that hold VIX futures.
• The Contango Trap: VIX futures are typically in steep contango (the front month is cheaper than the second month). ETFs must "roll" their positions by selling the cheaper front month and buying the more expensive second month, leading to significant long-term value erosion (approximately 9% per month).
• Actionable Insight: Volatility ETFs are suitable only for short-term tactical plays during market stress. They are not "buy and hold" instruments.

2. Put Selling Strategy: Methodology

Thomas advocates for a repetitive, "base-hit" approach to selling puts rather than long-term speculation.

• Short-Term vs. Long-Term: Thomas argues against selling long-dated puts (e.g., one year out). Selling shorter-dated options allows for more frequent trades and captures the accelerated time decay that occurs near expiration.
• Rolling Strategy: If a put goes "in the money," do not roll immediately. Wait for the time value to evaporate or monitor the ex-dividend date to avoid early assignment. Once the option trades near its intrinsic value, buy it back and sell a further-dated option to collect more premium.

3. Case Studies and Real-World Applications

• Cineplex (CG): For a viewer holding underwater call options, Thomas suggests shifting strategy. Instead of holding the calls, buy the stock and sell covered calls to capture premium, effectively lowering the cost basis and generating income while waiting for a potential takeover.
• Taxation (CRA Perspective): While not tax advice, Thomas notes that covered calls are generally treated as capital gains. Selling puts can be viewed as income if the CRA deems the activity "speculative" or if it constitutes a primary business/source of income.

4. Top Options Trading Ideas

Thomas provided three specific trades based on his "repetitive premium" strategy:

1. Dollarama (DOL): Sell the June 1st $65 cash-covered put for ~$3.50. This targets a ~2% return over 30 days.
2. Wheaton Precious Metals (WPM): Sell the July $155 cash-covered put for ~$4.20. This targets a ~3% return over two months, leveraging the company's immunity to rising input costs (like diesel) compared to traditional miners.
3. General Motors (GM): Sell the June 21st $72.50 cash-covered put for ~$1.90. This targets a ~2.5% return in 29 days, which annualizes to approximately 36%.

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Synthesis and Conclusion

The core philosophy presented by Chris Thomas is that options trading should be treated as a systematic, repetitive process of selling time value. Investors are cautioned against the "lottery ticket" mentality of buying long-dated options or holding volatile instruments like VIX ETFs long-term. By focusing on short-dated, cash-covered puts on high-quality businesses, investors can generate consistent income while maintaining a disciplined approach to risk management. The key takeaway is to prioritize the "time decay" curve and avoid the erosion inherent in long-term volatility products.