The ultimate guide on how to trade CPI week/ day
Of the last 7 CPI days.. we have seen SPY open up red 5 out of 7 times and of those 5 times 4 out of the 5 times have been >1% red. Of the 2 out of 6 times that have been green both have opened less than 1% green.
Looking at the actual intraday movement of CPI days there has only been one two times when SPY closed HIGHER than its opening price on CPI days… That means that 5 of the last 7 CPI days we have closed below our opening price regardless of whether we open red or green. The average % close below opening is 0.924%. On the two days that have closed HIGHER than opening price (April and July CPI) we have seen an average of +0.83%.
Of the last 7 CPIs the two days before CPI releases is averaging a total drop from open to close of -0.35%… however, if we look at the last four CPIs (April, May, June and July) we are averaging a two day drop of -2.61%. That’s a pretty massive drop for two days…
Should we swing overnight puts?
In general overnight puts are almost the golden ticket to success… interestingly enough lets look at if we bought puts for CPI and we were wrong (such as in January and April).
For the January 12th CPI which opened 0.6%+… on January 11th we open a ATM 469P. Premium at 415pm is 1.35 and it opened at 1.75. So even though that morning SPY would have opened 0.6% green your puts due to the lovely IV pump of a 0dte would have been profitable had you sold IMMEDIATELY at open… you would have sold for 29% profit however, hold it any longer then that and it would be worthless and never see green again.
For the April 12th CPI which opened +0.71%… On April 11th EOD we buy an ATM puts 439. Premium at 415pm would have been 2.7 and had we sold (and I mean IMMEDIATELY at open) you would have sold for 2.7. However, if you held for even 5minutes you would be looking at a premium of 1.98 which would give you a net loss of 27%. The other intriguing thing about this is that had you just held (and you woulda held through some big red) by 305pm you would have been back to even and by and by 325pm you would have been up 27% and able to close them for profit. (note you would be playing a 1dte here not a 0dte here due to the CPI being on a Tuesday so that saves you from some of the drop).
So the only two days it opened green we actually would be breakeven or profitable…. Now lets look at the smallest open day as comparison.
May 11th opened at -0.02%. If we bought a May 11th 0dte ATM 399put at 415pm the day before our premium would have been 3.79. When markets opened the next day it would have opened at 3.81. This would give you a measly 0.5% profit. However that first 5minute candle would have seen a spike to 4.74 for a profit of 25%. However after that these puts would have dropped to absolutely worthless by 1130am. Had you diamond handed them though by EOD market close you would be looking at a premium 6.96 for a 83.6%.
Okay so that 3 examples of when a over night put even if you were wrong (or barely right) was essentially a free play…. Now lets look at had we been correct (im only going to show the June and July as there were the most impressive opens)
June 10th CPI a 0dte ATM 401p woulda opened at 160%… and by 1030am that put would be worth 315%…
July 13th CPI a 0dte ATM 380p woulda opened at 101% and by 935am would be worth 121%… however, we all remember what happened that day… had you diamond handed these by 1040am you would be back to even and from there it would never see green again…
So what does this show you… well it shows you pretty much CPI puts ATM… are worth the gamble in my opinion… Of course all overnight plays should be considered lottos and should be lotto sized… no full ports.
Intraday movement before CPI
The January 11th, February 10th and March 9th (days before CPI) were all considered flat days. However, When we look at the last four CPI days (April, May, June and July) all four of them have had pretty significant dumps frm about 1pm to close. If you had bought puts around 1pm almost all four of these days you would have ended up extremely profitable.
The average drop of the last four CPIs from 1pm till EOD is 1.425% with the smallest being 0.8% in April and the most being 2.3% in June.
Intraday puts are almost certainly the play once the morning chop is over.
Day of CPI SPY trends
January 12th- rallied. dumped… then traded sideways all day.
February 10th- rallied till 1030 then dumped 2.35%
March 10th- rallied till 1015 dumped till 1130 then rallied 1.5% by EOD
April 12th- rallied till 945am then dumped 2.08% by EOD
May 11th- rallied till 1130am then dumped 3% by EOD
June 10th- dumped all day
July 13th- rallied till 3pm and then dumped 0.7% EOD (1pm to 2pm did dump 0.8% before recovery)
What do I expect CPI to be?
Something very interesting about this current CPI print and something I cant remember about any of the other CPIs… is that the TEForecast is actually higher than consensus. The consensus and forecast are almost never different from eachother let alone predicting higher… Arguably I am not an economist or expert in CPI but in general having the consensus lower then the forecast and lower then previous CPI is bound to be a big deal if that misses…
Okay so the Fed is predicting 8.9%… once again they are trying to say we have “peaked” and or slowed at least. Why does this matter? Well in May they attempted to say Inflation peaked also calling for a 0.3% drop in inflation and actual inflation came in 0.2% higher then expected.
The market when they heard that at 830am had a beautiful 2% sell off, however, “magically” climbed back to about breakeven by open and then later that day dumped from from its high to low 3.08%.
We have been averaging 0.3% higher than expected the last CPI. Which if we miss by 0.3% that would be 9.2% which is not only higher then expected obviously but its also higher than the previous CPI by 0.1%.
This chart comes from the Cleveland feds website and so does the next.
Something that is interesting about the Cleveland fed prediction of YOY cpi is that they are almost ALWAYS 0.3% lower then what actual inflation is… which means for this July CPI print they are expected 8.82% + 0.3% gives us a magical number of…. 9.1% CPI. Which would be higher than consensus.
Now why does this matter?
As you can see currently there is an 87% “consensus” that the Fed is going to do a 50bps hike come September. So if we get a higher than expected CPI rating on August 10th this is going to put additional pressure on the feds. A higher than expected CPI shows that we the rate hikes have still not calmed down inflation.
Something else to be interested in is the fact that JPOW himself said “im more concerned about PCE then CPI” and the PCE right after he said that was dogwater… with a terrible PCE, GDP now double negative and a terrible CPI print… the fed is going to be forced to get more aggressive.
The markets pretty much are running under the impression JPOW saved the day cpi has peaked, inflation is over and the rate hikes are going to be 50bps or no rate hikes. However, this inflation is going to rock the markets I feel.
Markets shook the last CPI off because they already expected the feds to do a 75bps hike. However, expecting a 50bps hike there is no way if CPI keeps going up that we are going to get a 50bps hike. And markets are going to recognize this.
Also unique is that the next FOMC is not till September 21st and we will have the CPI on August 10th and another CPI prior to this meeting on September 13th.
So whats the play? How am I going to play CPI?
Remembering like FOMC I trade off the data I have analyzed and what the highest probability risk to reward is… I will be opening a Wednesday expiration put ATM Tomorrow (Friday) before market closes at 415pm. I plan to open a SPY put (I am also holding an Apple out which I most likely will average down too).
From there my plan is to let these puts run until Tuesday before market closes. If we happen to get a massively red day on Monday (think 2-3% red) then I will take profits that day. If Monday is a green day or a wash day (doji) then I will hold till Tuesday. If neither of these days drops then I will hold till expiration in hopes of a June CPI repeat.
Okay so besides that I plan to open an overnight put Tuesday night. I will do an ATM put 0dte for Wednesday. Depending on what CPI comes in at and what we open at (red wise) I will close the put at open. I would be hesitant to hold any puts past open just because of how Julys CPI played out. If I happened to be wrong on that 0dte put play I would immediately sell at market open Wednesday.
All position sizes will be small.
Submitted August 05, 2022 at 01:33AM by DaddyDersch
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