Market Update: Short Holiday Trading Week and Its Impact on Options Trading
U.S. stock futures pointed lower on Tuesday after the main averages on Wall Street rose in light pre-holiday trading in the prior session. All three of the indices finished higher on Monday, with the tech-heavy Nasdaq Composite boosted in particular by a jump in Big Tech names like electric carmaker Tesla and iPhone giant Apple. Trading volumes were relatively muted as equity markets prepared to shutter for the U.S. Independence Day holiday on Thursday.
Meanwhile, investors remained focused on the release of key U.S. labor market data this week, including job openings figures on Tuesday and the monthly non-farm payrolls report on Friday. The numbers could factor into how the Federal Reserve approaches potential interest rate cuts later this year.
Fed Minutes Ahead
The Federal Reserve is set to release the minutes from its monetary policy meeting in June on Wednesday. During this meeting, the central bank left interest rates unchanged at a more than two-decade high range and signaled that it expects to cut borrowing costs just once this year. In March, the rate-setting Federal Open Market Committee had indicated that it projected as many as three reductions in 2024. However, recent data pointing to moderating but sticky inflation have led several officials to call for more evidence that price growth is sustainably cooling down to the Fed’s 2% target before rolling out rate cuts.
Speaking at a European Central Bank event on Tuesday, Fed Chair Jerome Powell predicted that inflation will return to 2% by late 2025 or the following year, but said policymakers will “take their time” before slashing rates. Despite the comments, markets are widely betting that the Fed will unveil two cuts before the end of the year, with the first estimated to come in September, according to CME Group’s closely-monitored FedWatch Tool.
Apple to Take Observer Role on OpenAI Board – Reports
Apple is set to take an observer role on the board of ChatGPT-maker and artificial intelligence-darling OpenAI, media reports have said. Citing people familiar with the situation, media outlets reported that Phil Schiller, the head of Apple’s App Store, was selected for the position. Schiller will be able to attend OpenAI’s meetings but will not be able to vote on board decisions, the reports added. With the observer role, Apple will attain similar insight into OpenAI’s inner workings as peer Microsoft. The software group is currently OpenAI’s largest investor, having plugged roughly $13 billion into the company. Last month, Apple announced that it plans to fold the ChatGPT chatbot into its offerings as part of a broader push by the iPhone giant to enhance its artificial intelligence capabilities.
Skydance Reaches Deal to Take Controlling Stake in Paramount – Reuters
Shari Redstone’s National Amusements has agreed to a preliminary deal to sell a controlling stake in Paramount Global to David Ellison’s Skydance Media, according to Reuters. The news agency, citing people familiar with the matter, said Skydance would pay $1.75 billion for National Amusements, the movie theater chain and holder of the Redstone family’s 77% interest in Paramount. Under the terms of the plan, Paramount, the century-old movie studio behind hit films like “Titanic” and “The Godfather” and owner of cable networks like Nickelodeon and MTV, would merge with its smaller counterpart Skydance. Paramount’s class B shares surged in extended hours trading following the news, which was first reported by the Wall Street Journal.
Crude Rises on U.S. Stockpile Draw
Crude prices rose Wednesday, boosted by industry data showing a bigger-than-expected draw in U.S. crude inventories. By 03:30 ET, the U.S. crude futures (WTI) traded 0.4% higher at $83.16 per barrel, while the Brent contract added 0.5% to $86.69 a barrel. Both benchmarks had fallen back from their highest levels since the end of April during the previous session on fading concerns that Hurricane Beryl would disrupt production in the Gulf of Mexico.
The industry body American Petroleum Institute released data on Tuesday showing that U.S. crude oil inventories fell by just over 9 million barrels in the week ended June 28, much more than expected. The Energy Information Administration is due to release the official weekly data later in the session. Gasoline demand in the U.S., the world’s biggest oil consumer, is expected to ramp up with the Independence Day holiday this week.
Short Holiday Trading Week and Its Impact on Options Trading
As we approach a short holiday trading week, it’s crucial to understand how the condensed schedule impacts options trading, particularly with respect to theta decay. With markets set to close for the U.S. Independence Day holiday on Thursday, traders need to adjust their strategies to make the most of the limited trading days.
Theta Decay in a Short Week
Theta, or time decay, is an essential factor in options trading. It represents the rate at which an option’s price decreases as it approaches its expiration date. In a short trading week, the impact of theta decay is accelerated. With fewer days for trading, each day has a more significant impact on the option’s value.
Here’s how to navigate this:
- Adjust Your Time Frames: With fewer trading days, short-term options will experience more rapid time decay. If you’re holding weekly options, be prepared for a quicker decline in value. It may be wise to roll these positions into longer-dated options to mitigate the effects of accelerated theta decay.
- Take Advantage of Volatility: Short weeks can lead to increased volatility, especially as traders position themselves ahead of the holiday. Use this to your advantage by capitalizing on swings in the market. Strategies like straddles or strangles can be effective in a volatile environment.
- Monitor Your Positions Closely: With the market closing for a day, unexpected news can have a more pronounced impact on your positions. Keep a close eye on your trades and be ready to adjust them as needed.
- Use Limit Orders: Given the potential for increased volatility and thinner trading volumes, using limit orders can help you execute trades at your desired prices, avoiding the pitfalls of market orders in a potentially choppy market.
The Role of Theta in End-of-Week Trading
As we approach the end of a short trading week, theta decay becomes even more pronounced. Options traders must be vigilant in managing their positions to avoid significant losses from time decay. Here are some tips:
- Close Losing Positions Early: If you have options that are losing value due to theta decay, consider closing them early in the week. This strategy can help you preserve capital and avoid the rapid decline in value as expiration approaches.
- Capitalize on Expiring Options: If you have options that are in-the-money, you might consider holding them through the end of the week to capture maximum profit. Just be aware of the increased risk and manage your positions accordingly.
- Stay Informed: Keep an eye on market news and events that could impact your options. Economic reports, earnings announcements, and geopolitical developments can all influence the market, especially in a short trading week.
Reminder for OP Members
The market closes early today and will be closed tomorrow for the 4th of July holiday. Plan your trades accordingly to avoid any surprises.
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In summary, a short holiday trading week presents unique challenges and opportunities for options traders. By understanding and managing theta decay, adjusting your strategies, and staying informed, you can maximize your trading success. And while you’re at it, take advantage of our on demand courses while we do the gambling for you buying you tickets for OP Lotto jackpot which is for $138 million dollars tonight! I’ll have your lotto tickets in chat after the bell.
Good luck and happy trading!
💰Stay tuned for more insights and remember, OP chat is your go-to place for today’s upgrades and downgrades. Also, mark your calendars for next week’s live session with Greg, open to all members!
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