Russell 2000 Index (RUT), Trending Stock Report

Zero-Days-to-Expiration (0DTE) options have changed the landscape for hedging event risk. For example, you may want to have a volatility hedge during the FOMC meeting announcement and the Fed Chair’s press conference tomorrow. It used to be that you would buy options for the first monthly expiration after the scheduled event. When weekly options were created, you only had to go out to the Friday following the event. Now you can enter a position in the morning for options that expire and whose price is determined at the end of that same day. Shorter time till expiration provides the hedge you want at a much lower cost.

If you’ve been with us for a while, you probably remember that we don’t like to use high probability credit spreads on days when the Fed Chair is speaking. With 0DTE options, we can take advantage of currently high options prices on the Russell 2000 Index (RUT) without the event risk that keeps us out of this type of trade during Powell’s press conference tomorrow because the options we are interested in expire today.

This Volatility Term Structure for RUT shows us the implied volatility of the at-the-money options for each expiration. To learn more about Volatility Term Structure, click here. You can see that today’s expiration has lower volatility expectations than tomorrow’s expiration. Expectations for the rest of the week are higher due to the event risk of the FOMC meeting and Fed Chair’s press conference. That’s because investors know and anticipate the potential for a big move when Powell is speaking. Today’s expectations are still high relative to other expirations

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of RUT’s price over the past year. You can see that the actual behavior (the blue histogram) shows us that RUT made fewer big moves than modeled options prices currently expect. That is good news for our option high probability strategy.

Investors are focused on the FOMC meeting and big earnings reports this week. RUT volatility expectations are higher than normal. Investors are overestimating the potential for a big move in RUT today. If RUT continues to behave the way it has over the past year, our chances for a nice single-day profit are very good.

To get the specific details and prices on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.