This morning was the unspoken holiday of the financial markets.
It was Yom Kippur, and it landed the Monday after a major options expiration, so a huge amount of risk had either rolled forward or come off the board entirely. 10 minutes into the session, the S&Ps were barely printing 3,000 contracts a minute.
It was a light and fluffy trade.
The S&Ps still blew through the $42 expected move for the day almost immediately.
By midmorning they were more than halfway to the $98 expected move for the entire week, and everybody wanted to call it a rally. We’ve been a stone’s throw off the all-time high for months, people.
At-the-money options with the whole trading day ahead of them were going for 88 cents this morning, when on any other day at that point in the session they trade for $1.35 or $1.40. Implied volatility got the life crushed out of it.
You sell that, you die.
So I bought it. I put on a strangle in the XSP, the mini S&P index options, which are cash settled. The 770 put and the 771 call together cost me $1.19.
A close above 772 or below 769 makes money. A close between the strikes means the trade doubly sucks, because both sides expire worthless, and the S&Ps could just as easily have run up 90 on the day as reversed and gone negative.
I bought 4 of them, not 3. I trade even numbers, and I’m dead serious about it.
With 4 on, I parked an order to sell 2 at $2.40, double what I paid. If that fills, the risk on the other 2 is completely covered and they’re a free ride, and with 3 on you’d be forced into a decision you don’t want to make.
That order wasn’t good till cancel either. There’s no good till cancel, you monkey!
It’s zero days to expiration, and every day is expiration day.
It didn’t need to be, because within an hour the strangle traded at $2.40 and I sold all 4 for double what I paid.
With volume that thin, tomorrow could reverse the whole move.
100% in just a couple hours is dead on accuracy. Of course, all my trades aren’t this painless. But they all follow the same process.
It’s a 60-second checklist I run, and it tells me whether the idea is viable or one I should skip.
To your success,
Don Kaufman
P.S. Why not just buy puts and hope we sell off? Because there are plenty of days I’ve come in here and paid more than $1.19 for a put by itself. This morning $1.19 bought me the call and the put together.
