How VOL evaluates a name.

The two questions we’re always answering

For every name that crosses our desk, the work compresses to two questions:

1. Would we want to own this business at the price the strike implies? Forget the option premium for a moment. If the put gets assigned, we wake up tomorrow as a long-term shareholder. Is this a company we’re happy to own at that cost basis?
2. Is the market paying us a fair premium for the volatility we’re actually exposed to? Options are an insurance product. When implied vol is rich relative to how much the stock has actually moved, we’re selling insurance at attractive rates. When IV and realized vol are roughly equal, we’re breakeven on the insurance math — and the case has to rest entirely on Question 1.

Most failure modes happen because someone answered Question 2 (“the premium looks great”) without honestly wrestling with Question 1.

The value lens

When a candidate gets queued for analysis, the first pass is straightforward valuation work. We’re looking for names that are cheap relative to their own history, not cheap on absolute multiples.

• P/E vs the 5-year median. A consumer staples compounder that’s historically traded at 22× earnings is a different proposition at 15× than the same multiple would be for a high-growth SaaS name. We compare a company against itself.
• Free cash flow yield. Cash returns — not GAAP earnings — pay dividends and fund buybacks. A 6–7% FCF yield on a quality compounder is a generous starting point; under 4% means the multiple is doing a lot of work.
• Dividend coverage. If a name pays a dividend, we check whether TTM free cash flow comfortably covers it. A coverage ratio of 1.5× or higher is “well covered.” Under 1.0 means the dividend is being funded by something other than the cash the business is producing — debt, asset sales, or accounting tricks.
• YoY growth direction. Cheap names are often cheap for a reason. A shrinking revenue line, EPS contraction, or declining FCF deserves a cheaper multiple than a growing business. Direction trumps level here.
• Share-count trend. Eight-quarter share count tells us whether management is buying back stock (creating value at the right multiples) or diluting shareholders. Both happen for good reasons, but we want to know which one we’re looking at.

If a name passes the value lens, it makes it onto the shortlist. Most names don’t. That’s by design — the editorial product is the names that survive the screen, not the screen itself.

The volatility lens

Once we like the business at the price, the question becomes: is the market paying enough for the structure we’d use to express the trade?

Options pricing reflects what implied volatility expects to happen. Realized vol is what actually happened over the trailing year. The gap between the two — the volatility risk premium — is what premium sellers are being compensated to take.

• IV well above RV (+5 points or more). Premium-rich. The market is pricing in more uncertainty than the stock has actually delivered. Good environment for cash-secured puts and covered calls.
• IV roughly equal to RV. Fair. We’re getting paid for the volatility we’re exposed to, no more, no less. Trades have to stand on the value case alone.
• IV well below RV. Discounted. The market is underpricing risk. This is a setup we’d be a buyer of optionality on, not a seller. Rare on the names we’re drawn to, but it happens.

We don’t use IV-rank percentiles. Building a credible 1-year IV history requires data we don’t carry, and fabricating one would mislead readers. IV-vs-realized-vol is grounded in observable price action — a cleaner read.

Where the structures come from

When both lenses line up — cheap business, rich premium — the structure usually picks itself:

• Cheap + premium-rich. Cash-secured puts at a strike below current spot. Pays a meaningful yield if assigned; lands us in a business we wanted to own anyway, at a price we wanted to pay.
• Cheap + fair premium. The same put setup, sized smaller. The value case is the main driver; the premium is a bonus, not the thesis.
• Fair value + premium-rich. Sometimes a setup pays well enough that we’ll write a shorter-dated put at a deeper discount to spot, betting the price moves enough to make it expire worthless. Higher annualized yield, narrower margin for error.
• Expensive at any premium. We pass. This is the most common outcome — and the most underrated discipline in the strategy. A 30% annualized yield on a business we wouldn’t want to own is not income, it’s capital at risk.

The honest version: why subscribers pay for it

Everything above can be done with a calculator and a 10-K. The framework isn’t secret — it’s just tedious. Three or four names a week through this checklist is several hours of work, every week, on names that mostly won’t pass.

What the letter actually delivers: the work we did last week, the names that survived, the strikes and expirations we’d actually use, and our real trade log with closed-trade results. The calculators on this site demonstrate the lens; the publication is the applied work.