Thursday Shopping List

Another sell-off this week?

After two special occurrences in a row—one before the GDP and the other last week before the employment report—we're back to a normal Thursday. Things certainly look a bit different than they did three weeks ago. Since the beginning of Q2, the market has shifted its focus back to the main topic of the year: the number of rate cuts in 2024.

We started the year expecting 7 to 8 cuts. Three months later, market participants slowly realized that it would already be amazing if we managed to get 3. Add to that the increase in geopolitical risk, and you've got a little extra premium baked into the market.

Nothing too crazy, though—VIX 16 isn't exactly a sign of tension, and it's certainly not something that will make us reconsider our Thursday trades. These lists aim to capture the premium in overpriced 1 DTE options right before expiration. Why would that work?

It's much harder to predict the terminal distribution of an underlying over one day than over a longer period. As a result, the prices agreed upon between buyers and sellers tend to overstate the actual movement observed in the underlying on the last day of trading. This is particularly true for assets with a high-risk perception—think VXX or EWZ. However, this effect becomes more pronounced when the overall market risk perception rises.

We'd rather make the Thursday Shopping List trades at VIX 16 than at VIX 13.

Let's take a closer look.

The rules

Before we start, let’s do a quick round-up about the rules.

• Short an ATM straddle in the 1DTE contract 12/04 as close as possible to Thursday night's close. In all our metrics and charts, we assumed an execution at 3.50 p.m., but the entry timing doesn’t matter too much: avoid getting in too early, but getting in too late gets you less premium.

• Exit the position as close as possible to Friday's expiration. Again, we assume an execution at 3:50 p.m., but depending on your risk tolerance and satisfaction with the returns, it can be useful to manage the position earlier.

• One word of caution: if you get assigned, leave the trade altogether and eliminate the underlying. If you decide to keep it and “sell premium against it,” it is at your discretion and outside this strategy's scope. It’s okay to keep the other leg expiring out of the money; there is no reason to pay an extra dime to your broker. Ensure it is far enough from any post-market move — the settlement happens at 4.15 pm, not 4 pm.

One last thing— our Discord community is now burgeoning. We monitor this strategy, as well as many others mentioned in this newsletter. Contact us if interested, and we will share the pricing details.