There’s a check you can run in fifteen seconds that tells you more about a day’s risk than any market call.
Pull up the expected move on the index, then look at where price is sitting.
If you’re sitting inside it, the day is roughly symmetric. If you’re outside it, the day is a fight and the gloves are off.
Friday was the second kind, and here’s what that looked like.
The expected move in the SPX was 45 bucks, and we opened around 7,670, below the lower edge of it.
So the upside case was a rally back to where the options said we should be, around 7,700. That’s 30 points, and no particular reason to assume we go past it.
Now the other side.
Once you’re outside that band and price starts rolling down the hill, gamma risk kicks in and they start selling the crap out of it. That’s not 30 points. That’s two or three times it, so the S&P could be down another 50 or 60.
Thirty up, sixty down, same session. A destabilized, asymmetric setup, and you didn’t need an opinion about direction to find it.
Trying to assign whether the market goes up or down on a day like that is insanity. I’m not doing it and neither should you.
But you can absolutely assign risk and reward. Those are two completely different jobs and most people never separate them.
There was a second layer on Friday worth knowing about.
It was a monthly expiration, third Friday, and the SPX settles off the opening print. Every market maker carrying hedges into that settlement has to unwind them the second the bell goes.
That’s why the first ten or fifteen minutes were violent for no visible reason.
Hands and feet inside of the vehicle. No heroes get made in the first ten minutes of an expiration Friday, and whatever you do in there is going to feel like exactly the right trade at exactly the wrong time.
That arithmetic is the same one I run on every trade I take, except I run it before I click instead of after the open.
Every position I put on sits in a box. I know where the floor is and I know where the ceiling is, and I know both numbers before I risk a dime.
Costco, April of last year. I put $222 in and closed it six days later for 54%.
I had no opinion on Costco. Couldn’t have told you if it was a good company that week. It went against me for the first two days and none of that mattered, because the box was already drawn.
I’ve hit 30% or better inside 30 days 44 times in the last 16 months, and I laid the whole thing out on a training yesterday. Same box drawn on Lulu, Rocket Lab, Apple and XLV. Four companies, four different weeks, one shape.
→ You can watch the whole thing here
To your success,
Don Kaufman
