Category Archives: General Info

Navigating the ‘Opposite World’ of the FOMC

FOMC Decisions and Wall Street Psychology

Introduction to ‘Opposite World’

In the realm of financial trading, the ‘Opposite World’ theory has emerged as a compelling framework for understanding the counterintuitive reactions of Wall Street to economic data and Federal Open Market Committee (FOMC) decisions. This phenomenon flips traditional market expectations on their head, where good news can spell bad tidings for the markets, and vice versa.

The Fed’s Influence on Markets

The FOMC wields substantial influence over financial markets. Its interest rates and monetary policy decisions can have immediate and far-reaching effects on Wall Street. In an economy striving for balance, the Fed aims to navigate between promoting employment and controlling inflation – a dual mandate that often results in complex market responses.

Understanding ‘Opposite World’ Theory

In ‘Opposite World’, strong economic indicators, typically seen as signals of a healthy economy, can induce fear of aggressive Fed actions, such as rate hikes. Conversely, weaker indicators might be welcomed if they imply a pause or reversal in policy tightening. This inversion of expectations stems from concerns that the Fed might overextend its mandate to curb inflation, potentially stifling economic growth.

Good News is Bad?

Traditionally, robust employment data would be unequivocally good news. But in the eyes of ‘Opposite World’ advocates, such strength could encourage the Fed to continue raising rates, cooling investment and spending. The fear is that the Fed might overshoot in its quest to tame inflation, leading to a downturn or even a recession.

Bad News is Good?

On the flip side, indicators suggesting economic cooling can be seen as positives in ‘Opposite World’. Weaker employment figures or manufacturing data might signal to the markets that the Fed will hold off on further rate hikes, maintaining lower borrowing costs and potentially extending the economic expansion phase.

Wall Street’s Reaction to FOMC Decisions

The anticipation and aftermath of FOMC meetings are quintessential ‘Opposite World’ stages. Even hints of dovish sentiment from the Fed can ignite rallies, while hawkish undertones can send the markets into a downturn, regardless of the broader economic context.

Case Studies in ‘Opposite World’

Consider a scenario where unemployment rates drop lower than expected. In a conventional market, stocks might surge. However, in ‘Opposite World,’ this could trigger a sell-off due to fears of ensuing rate hikes. Alternatively, when inflation rates cool off more than anticipated, traders might breathe a sigh of relief instead of concern over a possible economic slowdown, expecting the Fed to ease its foot off the rate-hiking pedal.

Strategy for Traders in ‘Opposite World’

For traders, particularly those in short-term strategies like 0-DTE (zero days to expiration) trading, ‘Opposite World’ requires a nimble and nuanced approach. It’s essential to read between the lines of economic reports and FOMC statements, anticipating the market’s ‘opposite’ reaction and preparing strategies to capitalize on this.

Risk Management in ‘Opposite World’

Navigating ‘Opposite World’ also demands rigorous risk management. The unexpected swings can result in significant gains or losses, and traders must use stop-loss orders and position sizing wisely to mitigate potential risks.

Conclusion: The Paradox of Perception

The ‘Opposite World’ theory underscores a paradox within financial markets – the perception of data can be as powerful as the data itself. Traders and investors must stay attuned to the market’s psychological landscape and the Fed’s policy direction, using each new piece of information to inform their strategies in this topsy-turvy trading terrain.

What is the S&P 0DTE Strategy?

0DTE or Zero Days To Expiration refers to the very last day that an options contract exists. This is a very important time in the life of an options contract for a trader because something very special happens on that day, both for the buyer and seller of that contract. We are most interested as the seller, because as the seller you stand to benefit far more than the buyer.

That benefit on the last day is called premium decay. Premium is the extrinsic value of an option, for an out of the money (OTM) option it represents the entire value of that option. Premium decays at an ever increasing rate from the time the options contract is conceived, right up until the moment the contract expires. And at no time does that premium decay faster than the last day, or Zero day, of expiration. As the seller of the options contract, the premium is what you receive for taking on the obligation of insuring the strike price of that contract.

That’s right, you are an insurance salesman when you sell, or write an options contract! And don’t worry about this sounding like a pejorative, it is not, in fact it is the most important job in trading and potentially the most lucrative. Just like in the real world, insurance companies seem to have all the money. There’s no doubt that insurance is a great business to be in.

Well, this is central point to our 0DTE strategy. We sell insurance in the form of S&P options contracts on the very last day of expiration (0DTE). There are two kinds of S&P assets that have options that we concentrate on, they are options on futures and on the index, also known as E-mini S&P futures and the SPX index, respectively. They both have similar pricing and both have contracts that expire 3 times every week; Monday, Wednesday and Friday, unless there’s a holiday where the market is closed, then Tuesday if it’s a Monday holiday, and Thursday if it’s a Friday holiday.

The strategy is to sell S&P options on the last day of expiration and collect the fast decaying premium. We do this by placing an options premium collection strategy, such as a Butterfly spread, with a spread width that is likely going to overlap that day’s range of price movement in the S&P. We optimize the timing and placement of the strategy so that we are presented with an asymmetric risk to reward situation. The better our timing and placement optimization, the greater the ratio between risk and reward. The range can go from 1 to 4 and as high as 1 to 20, risk to reward. Much of this is dependent on the volatility present for that expiration day.

In order to optimize timing and placement of the options strategy, we do a thorough analysis of any potential market catalysts that are likely to set the price in motion. We develop a directional bias and try to determine both the direction and magnitude of that move. We also do a volumetric analysis to generate a market structure, which we use in conjunction with the directional bias to develop price path scenarios. Then we create options strategies that model these scenarios to create profit collection opportunities. After entering a trade, if the price movement is favorable, we employ profit collection strategies to maximize our realization of profit.

So, the strategy is actually comprised of 4 steps, within each step are one or more disciplines, or skill sets. The overall strategy is definitely discretionary. We operate it with some rules, but mostly guidelines that help the trader adopt the strategy to their personal capacity and tolerance for risk. Here are the 4 steps of the strategy:

  1. Global macro analysis to determine catalysts for price vector (direction and magnitude).
  2. Volumetric analysis using Volume Profile to determine market structure (support, resistance, value areas)
  3. Options modeling, bringing together steps 1&2 and optimizing for risk to reward.
  4. Profit management strategy

These 4 steps are what comprise our primary directive, the trade. However we put on a trade several times a week, under many different conditions, and so there is a larger process that governs these individual discrete opportunities. We might even refer to each trade as a mini project. Our main goal is to maximize our return on capital used with the least amount of drawdown possible. We also want to learn from each trading instance, so we envelop all trades with a continuous improvement process that borrows from agile processes in the areas of manufacturing and production, software development and management processes.

We take from well established processes and philosophies like Kaizen, Kanban IkiGai, and Scrum to create our own continuous improvement process. We have no name for it currently, so we’ll just call it C0DTE, which stands for Continuous improvement of the Zero DTE strategy. I will post more about this in the future.

Mind Expanding Asymmetric Risk

Asymmetric risk is the idea of taking a small risk to produce a comparatively large return. This simple, yet mind-blowing concept will transform your trading career and overall quality of life. Yet, the concept of taking asymmetric risks is not discussed or even mentioned as an option in common trading strategies.

Give me a lever long enough and a fulcrum on which to place it, and I shall move the world. – Archimedes

Perhaps it would be impossible to find a lever large enough, and tough enough to not snap, or a fulcrum that wouldn’t be crushed, to move the world, but you could certainly find what you needed to move a very large boulder with little effort. And the same is so for trading strategies. Then why wouldn’t you use such power if it were at hand?

The reason is that we are conditioned, or even programmed to believe such power is not within our reach, or even available to us, that there is undo risk or the opportunities are so fleeting as to be futile to pursue. This is simply not the case, in fact, the opportunity to use an asymmetric method in your trading is frequently available to you, and it’s quite simple to employ. In my opinion, if you are presented with an opportunity to use asymmetric risk to reward, you should, without hesitation or fail, in fact, you should be seeking it out as the first option before all other options.

The ability to do great things with little effort, by using a bit of ingenuity escapes the vast majority of people, but that doesn’t have to be you. The really crazy part of this concept is that this doesn’t just apply to trading, asymmetric opportunities exist in all parts of life, yet we are blind to them. We only need to open our eyes and our minds.

Ancient Babylon town with the famous Babel tower,

Have you ever read 1926 classic The Richest Man in Babylon, by George S. Clason? It’s a book of 4,000-year-old parables filled with financial advice that is relevant even today. People these days look at anything (books, movies, ideas) more than 3 years old as useless, so yesterday. But this book, printed almost a century ago, with 4,000-year-old stories, has a great deal to teach us about the asymmetric risk to reward.

Consider the parable of the merchant trapped outside the city walls because it was nighttime. The gates of the city would not open until morning. The merchant had just come back from selling his wares and had quite a hefty amount of gold coins on him. As he was about to light his bonfire to camp outside the gate, he heard the bleating of a flock of sheep.

Another merchant, a sheep master, arrived with this flock. Introductions were made and the sheep master said he lived nearby and wanted to sell his sheep for a good price in the morning. Suddenly, a house servant of the sheep master arrived and with bated breath warned his master that his son was gravely injured in an accident. The sheep master was extremely worried and told the merchant he would sell all of his sheep at a great discount so he could hurry home to his son.

The sheep master said he had over 200 sheep with him. The merchant’s gold was just enough to cover the asking price for all the sheep. And he knew from experience that other merchants in the city would pay more than twice the price for those 200 sheep. But there was no way to confirm that there were 200 sheep because it was too dark to count them. The merchant was presented with an asymmetric risk. The reward was to make a quick profit by buying the sheep for cheap and then selling them in the city for a much higher price. The risk was that the old man might be lying to him about the number of sheep. What if there are only 100 or 50 sheep in the flock? The merchant ended up not buying the sheep.

So the old man decided to hurry home and left his servant there to sell the sheep in the morning. The next morning, when the gates opened other merchants came out and bid up the price of the sheep to four times the amount of gold the sheep master offered the merchant. The first merchant squandered his chance to profit greatly because he didn’t take the asymmetric risk.

Obviously, we are not talking about trading sheep here on a site dedicated to trading the last day of options expiration, but we are talking about recognizing the opportunity and a situation that affords you the ability to achieve asymmetric profits from small amounts of risk capital, often as much as 500-1500% from trades as small as $50. So, why wouldn’t you do this? Why would you do something else under the same conditions, that only offered a 10 to 20% return on $1000 of risk capital? This seems to be a rhetorical question.

The reason you don’t do the asymmetric trade is that you are completely oblivious to it, you have been conditioned to believe it doesn’t exist. therefore it’s not on the table as a possibility…it never enters your mind. And so, you suffer great anxiety and the peril of risking large amounts of your money for small scraps of profit. yet the opportunity is right there, every time.

Earlier in this post, I said asymmetric risks are everywhere in life, not just in trading. Often we are confronted with mind-blowing opportunities that could change our lives. But we don’t even recognize they are there, right before us, within our grasp, and all we have to do is ask. But we don’t. And why? Because we were afraid of rejection, the person would say no. Consider this…you avoid great opportunities because you are afraid someone says no to you. But what if they had said yes? Well, you will never know, will you?

Asymmetric risks do not favor those who are complacent with the status quo, for the unadventurous, or those who are simply to lazy to take small risks, or afraid to just open their eyes, or squeamish to ask simple questions. However, if you can get over these simple social quirks, the world of abundance awaits you.

Why don’t you start with our 0DTE service. It is all about asymmetric risk to reward. With very little effort you could be that merchant that took a small risk with a trial.

ODTE Should You Trade Options for SPX or S&P E-mini Futures?

The 0DTE, a.k.a. Zero Days to Expiration, options trading strategy gets its edge from the exponentially increasing decay of premium as expiration nears. There’s no other day where it decays faster than on that very last day of options expiration. The most popular asset to trade on 0DTE is options on the S&P 500 Index (SPX) because of the number of opportunities a trader has each week. There are three expiring contracts for options on the index every week; Monday, Wednesday and Friday. But the SPX isn’t the only asset class that has 3 opportunities per week, there are at least 3 others; the SPY ETF, the S&P E-mini Futures (/ES), and the Nasdaq Index (NQX).

Many people tout the 0DTE strategy as a great way to produce consistent income using high probability strategies like ultra low delta Credit Spreads and super-wide Iron Condors. This appears to be a honeypot to many naive retail traders, and so they dive. waist deep into services that promote 0DTE with the SPX.

So, why are options on the SPX most popular? Is it better than the others, easier to trade, easier to profit, lower cost, fewer restrictions? The answers will surprise you. First a spoiler alert, the SPX is definitely not the best way to trade options on the 0DTE.

Before we talk about why the SPX is not the best way to trade a 0DTE strategy, let’s take an objective look at the differences between these 4 asset types; the SPX, the SPY, the S&P E-mini and the NDX. You should first know that all 4 assets have 3 expiring contracts per week. If there’s a holiday on Monday or Friday, then Monday expirations are moved to Tuesday, and Friday expirations are moved to Thursday. The next thing you need to know is that index options are European style, while the SPY and futures are American style options contracts. For an explanation of the difference between American and European options go here.

So, the first way we’ll tackle the which is better question ir to compare European and American options.

EXPIRATION EUROPEAN: Gives the option holder the right to exercise the option holder the right to exercise the option only at the pre-agreed future date and price. Beware of Monthly AM vs Weekly PM expirations, only choose weeklies that have PM expirations, otherwise you risk significant capital loss from overnight changes in the index price.

EXPIRATION AMERICAN: Gives the option holder the right to exercise the option at any date and time before the expiration date at the pre-agreed price. Always PM expirations.

SETTLEMENT EUROPEAN: Always settled in cash, there’s no underlying because the index is just a calculated value.

SETTLEMENT AMERICAN: Settled in cash if you sell your option prior to expiration. However, if your option is assigned prior to expiation, then you will be responsible for the margin requirement of the received asset. If your option is ITM at expiration there will be automatic assignment, otherwise nothing will happen, as it will be worthless.

PREMIUM:The liberty to exercise American options at any time makes them more in demand, and therefore they typically have more premium associated with them. This is a good thing for 0DTE as the greater the premium, the greater the potential profit, and lower risk.

LIQUIDITY: European options on the SPX generally have greater volume and open interest than the E-mini Futures, however both are highly liquid, and regardless of your order size it is likely to be filled with a minimal spread with either the the SPX or E-mini. Same goes for the SPY ETF. The NDX is a different story, it is far less liquid with much larger spreads, and is much more expensive to boot.

ANALYSIS: The E-mini futures are far easier to analyze because they are available to trade 23 hours a say, as opposed to the SPX which is only traded during normal market hours. In addition to the restricted hours, there’s no volume associated with the index, because nobody trades the index directly, so volumetric analysis is impossible. However with the E-mini there is volume and so that along with being open 23 hours a day, make analysis much easier and more accurate compared to the SPX.

TRADING: As with analysis, trading is much easier with the E-mini than with the SPX or SPY (NDX really isn’t worth it). You can trade the E-mini all hours of the day and night, except for a small window in the early evening between 5 and 6PM EDT. This provides far more opportunity to profit and to take advantage of external events that can affect price. With the SPX you are often left with a surprise if you attempt to enter a trade and hold it overnight. Also, you can’t take advantage of early morning economic reports prior to the market opening, as you can with the E-mini.

PATTERN DAY TRADER RULE: If your account is not at least $25,000 then you are at risk of violating the PDT Rule with the SPX and the SPY if you open and close an SPX or SPY options trade more than 4 times within a 5 day rolling window. You risk having your account halted for 90 days upon your fist violation. There is no such restriction with E-mini futures, you can open and close trades as often as you like, with no restriction on account size.

COMMISSIONS: The cost of trading SPX and SPY options is generally less, with most brokers offering prices as low as 65 cents per contract plus exchange fees. With the E-mini, most brokers start new traders off at $2.25 per contract, but after a short while you can usually negotiate that price below $1 per contract, plus exchange fees.So, this is a clear advantage for the SPX and SPY.

CONCLUSION: So, if cost is your only consideration and you have a small account, then you. might choose the SPX or SPY. However, for every other reason, plus tax reasons which I did not mention (perhaps in another article), the E-mini futures is FAR superior to the SPX when trading the 0DTE strategy. There are no restrictions with regard to the PDT rule, time to trade and analysis, you can execute based on better information and collect far more premium, have higher profit potential, with lower risk, and lower time in the trade.

0DTE – What Does ODTE Mean?

If you do a web search you’ll find that the top result for ODTE is the “Office for Developed and Transitional Economies.” What is that? I have no idea.But it sounds important.

A little further down and you come to one of the best, if not the best, financial recourse sites Investopedia. Their definition doesn’t even use the letters in 0DTE, they call it the End of Day Order, but this is more commonly referred to as the EOD. So this can’t be right.

So you keep on searching until you realize that separating the zero from the DTE helps the search, or substituting the word Zero for the number helps too. Boy this is frustrating. Why is it that so many options traders know what it is, yet you can’t Google the term hardly at all?

0DTE – Zero Days To Expiration

The last day before an options contract expires. Why is that such a big deal? It’s a big deal because after that day the options contract will no longer exist, it will be worthless, it will never see the light of day. Kaput. Fini. Gonezo.

It’s also the day that the options premium decays the fastest, and with every minute, every second it decays even faster, until the contract is completely depleted and the big bell rings, the market closes and the option is dropped in the bit bucket, and someone collected all that premium, and someone else was tripped of it.

Premium starts decaying from the moment an options contract is created. And then it decays in an exponential fashion until that fateful day…0DTE.

For a trader this last and final day provides a unique opportunity to make money, by fashioning trade strategies that take advantage of the unique properties of the zeroth day. In fact this website is all about that day and strategies that help traders grab that premium, cuz premium is money, and money is profit, and profit is good.