Thursday Shopping List

Let's scratch the trader's hitch.

This week began with predictions that the backwardation of the realized volatility curve might lead to a subdued period despite a packed economic agenda. So far, the markets have remained relatively uneventful, with the VIX comfortably under 14 and realized volatility beginning to level off. The upcoming PCE data might test this tranquility, but who can predict what will happen again? And if you can, just make directional bets and stay away from volatility trading (yes, Nancy Pelosi, we are looking at you.)

Today though, we're injecting a bit of excitement and spice into the mix. A lively debate unfolded in our Discord group yesterday on how to satisfy the common trader's itch—the compulsion to engage in the market, place orders, and “stay active.” Everyone has their strategy, whether it's resorting to paper trading, allocating a small account for experimental trades, or confining oneself to a single product and a single lot.

At Sharpe Two, we have the Thursday Shopping List - a list of 1DTE trades we put on Thursday night and hold until expiration. To stay true to our principles, we use data analysis to identify situations where the mispricing in options is so big that the likelihood of being profitable is high. If you want to read more about the approach, you should refer to this article.

Let’s play!

The rules

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

• Short an ATM straddle in the 1DTE contract 01/03 as close as possible to the close on Thursday night. In all our metrics and charts, we assumed an execution at 3.50 pm, but the timing of entry 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 the expiration on the Friday. Again, we assume an execution at 3.50 pm, but it can be useful to manage the position earlier, depending on your risk tolerance and how happy you are with the returns.

• One word of caution: if you get assigned, get out of the trade completely. Get rid of the underlying: if you decide to keep it and “sell premium against it,” it is at your own 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.

We had a lengthy conversation in the Discord Channel yesterday about why these trades work - it all ties down to the VRP and the current market regime. We would certainly not enter these trades if the VIX jumped from 14 to 20 and there was talk agitating the entire marketplace, like the Fed hiking again in 2024 or the rapid collapse of the tech sector post-earning season.

Our regime computations are available through our API. Alternatively, you should also consider joining the Discord. We are building an environment to help retail traders narrow the gap with the pro trading floor: we have calls throughout the week, a trade logger to review and monitor positions, and, of course, we spend a lot of time discussing research. I you are serious about accelerating your path to profitability, there is still an early bird offer - reach out to learn more.