Thank you to our new subscribers this week - Dan, Mark, Tom, Joh Lo, and all the others.
As we inch closer to the finish line of what's already been a stratospheric year, the major indices have been toying with investors' nerves, seemingly stuck in place.
Didn't Drake aptly put it in one of his hit songs:
“Right foot up, left foot slide […] either way, we're about to slide”?
This feels especially timely as DJ Powell gears up for his FOMC season finale this Wednesday, ready to end the agonizing suspense. The burning question remains: what will be the market's anthem for the year's end? Will it be Daft Punk's "One More Time" or Adele's "Rolling in the Deep"?
“Either way, we're about to slide.”
While we typically steer clear of making directional bets, here's a tip for those who favor them. Have you heard of PEAD? No, it's not a music band but an acronym for Post Earnings Announcement Drift. For those interested, check out this old yet fascinating paper, mixing market data and sociology.
Traditionally observed in stocks, PEAD suggests that after a major information release, the market takes time to absorb and react to the new data. Once it picks a direction, this trend often persists for a few days due to the gradual dissemination of information.
We anticipate the market will follow a similar pattern on Wednesday - whether up or down, either way, we're about to slide (got the earworms yet?)
Remember, no rookie mistakes: stay patient and conserve your energy for what comes after the Before. Indeed, on Tuesday at 8:30 AM ET, we'll see some fresh inflation data released. But the real action? That kicks off between Wednesday at 2 PM ET and Thursday's close. During that period, we expect intraday volatility to be at its peak, but once that window passes, we expect things to start becoming clearer.
In other news, FX and commodities traders have been quite busy, doing everything they can to put their hands on the Volatility Award for December. You thought oil cratering to $65 close to the year's low was impressive? Wait until you see the action in USDJPY.
The Bank of Japan's hint at a potential rate policy change triggered a veritable tsunami in the currency pair. It plummeted from just shy of 152 to 143 in the past month, including a staggering 400 pips drop in just a few hours last Thursday.
Who wants to play with falling knives? Not us, thank you very much.
For now, we're watching from the sidelines. Will these shifts open up opportunities for volatility traders? For sure, it will. Don't be surprised if one of our upcoming 'Signal du Jour' focuses on the Yen.
Last week, our spotlight was on USO and oil; the trade has been profitable so far. However, remember the main message: betting on mispriced volatility doesn’t mean there will be no volatility at all, and as the weekend draws closer, we should be nearing our exit target somewhere on Monday or Tuesday. There is no reason to play mouse and cat with Gamma until the expiration. But hey, don’t take our word for it; listen to Steve Miller Band instead:
Thank you for reading until this point, and here are a few smart reads from last week:
The interview of Claudia Sahm - by the FT
If you are more of an audio person, do not miss this very insightful debate between Cem Karsan (@jam_croissant) and Andy Constant (@dampedspring)
0DTE improved strategy and the curious case of Thursdays - by Sharpe Two
Did you take our quiz, by the way? It’s never too late to hone your skills.
If you are still here, consider upgrading to a paid account and unlock our full 'Signal Du Jour' collection. Dive into real data with us as we identify volatility trades boasting a high Sharpe Ratio – trust us, it's worth every penny.
But why lean on 'Signal Du Jour'? Why not just sell and collect premiums daily for some sweet passive income?
We're planning a deep-dive article on this, but here's a quick teaser: not all volatility trades are created equal, even when the implied volatility is sky-high.
Take, for instance, our recap of ATM straddle sales expiring in the November cycle across QQQ, SPY, TLT, and USO (sell every day the ATM straddle expiring on 2023/11/17). We kicked off at the end of October when the VIX was hovering above 19. The outcome? Most of these trades didn't hit the mark.
Sure, you could've played defense – think delta hedging, rolls, and the like – but let's face it, those strategies can be pricey. At Sharpe Two, we're all about hunting down setups where the mispricing is so blatant that even a drift in the underlying won't throw us off course.
And clearly, in that instance, the negative returns didn't justify the risks, even in a high-volatility environment. It would have been great to know that in advance, right? That's the magic of our 'Signal Du Jour'.
So subscribe now, follow us on Twitter (@sharpe__two), and if you enjoy our content, consider recommending us to your friends. By helping them to make better trading decisions, you are supporting us in our quest to improve the quality of trading analysis available to retail investors.
Happy Trading.
Ksander