Thursday Shopping List

Bets to celebrate the Fed.

As Chairman of the Federal Reserve, Jay Powell pledged to deliver consistency and clarity. True to his word, Chairman Powell has once again come through. The Fed is sticking to its guns, planning to cut rates three times in 2024. Despite the recent uptick in inflation data, this marks the first time since December last year that we've gotten a firm commitment on the number of rate cuts.

The market's reaction? A standing ovation. Equities soared to record highs this morning, while the VIX plummeted to its lowest levels.

Here's the kicker: the VIX can still go even lower. Predicting just how low is tricky, but one thing's for sure: even in this ultra-low volatility environment, options prices are likely to be higher than the actual movement in the underlying assets.

And that brings us to today's trade, the most entertaining of the week. The Thursday Shopping List is like playing a rigged slot machine in your favor—the odds of winning are way higher than losing, and the payoff is instant.

To refresh your memory, we aim to pinpoint situations where the price of 1-DTE options is significantly higher than the expected movement in the underlying. There's no delta hedging involved, so it's a straightforward gamble on the terminal distribution: Will the underlying stay within the straddle?

We're not just throwing darts here. We focus on ETFs where there's a fundamental reason for the market to overprice these options. For a deeper dive into our methodology, check out our previous analysis of EWZ and VXX.

Without further ado, let's dive in!

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 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 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. Ensure it is far enough from any post-market move — the settlement happens at 4.15 pm, not 4 pm.

One last thing—we still have a few spots left in our Discord community, where we monitor this strategy, and many others mentioned in this newsletter. If that resonates with you, the early bird offer is still available. Contact us if you're interested!

The list

Let's take a look at how last week's trades performed:

VXX and UVXY were on a wild ride last week, and you had to hold your nerve until the final hour of trading to lock in those profits.

SLV is an interesting one. After chatting with the Discord group, we decided to steer clear the night before as the option price was already high. It might not have been the most lucrative trade when you factor in the costs.