Strats Labs

Daily recap 7/27:

A very volatile day in the equity markets. Trillions of dollars were wiped off after Iran claimed "no peace talks."

$SPX and $NDX gapped up over 1% on the cessation of strikes from both sides over the weekend. It didn't take long to fill the gap, erase the gains, and sell off to 7385.

I sold OTM put credit spreads about 40 minutes after the open when the market was still calm.

Then the news hit.

It killed the momentum and dragged my positions toward max loss by the afternoon.

I didn't panic. I reassessed the odds of $SPX closing above 7400. A huge negative GEX exposure sits around that level.

In a negative gamma environment, moves can extend further. But I doubted we would see that kind of drop ahead of key U.S. events: FOMC on Wednesday and U.S. GDP on Friday.

If today were Friday, I could have anticipated a move toward 7300. But ahead of big events, the index rarely swings that far. Today's price action didn't change my view.

I held my positions through the unrealized losses.

I also opened an Iron Fly in $XSP to avoid conflicting with my existing put verticals around the 7400–7410 zone.

The payoff tent was wide enough to expire profitably. $SPX closed at 7413.8.

Not my favorite day trading 0DTEs, but I still finished green: +$579. 💵

Tomorrow, I plan to weigh the macro environment more carefully and deploy more non-directional bets.

How did you trade today? Put your thoughts below. 👇

Not financial advice.

I’ve been trying to understand what’s really driving the weakness across the AI complex.

It’s easy to blame headlines, valuations, or profit-taking.

I think the bigger story is the cost of capital.

Over the past few weeks, real interest rates have moved materially higher as Treasury yields have risen while long-term inflation expectations have remained relatively stable.

That may not sound significant, but for long-duration growth assets, it’s one of the most important variables in the market.

At the same time, policymakers have signaled a more restrictive stance toward financial conditions. If the Fed continues reducing its balance sheet while Treasury issuance remains elevated, private markets will need to absorb more duration at higher yields.

That raises financing costs across the economy.

Now consider where the AI trade stands today.

Hyperscalers are investing hundreds of billions into AI infrastructure, data centers, networking, and power capacity. Those investments increasingly rely on debt financing rather than excess free cash flow.

Higher real rates increase their cost of capital.

Higher funding costs reduce the present value of future cash flows.

That’s a difficult combination for a sector whose valuation depends heavily on earnings expected years into the future.

The market isn’t questioning AI.

It’s questioning the price of building it.

That also helps explain why semiconductor stocks have struggled despite healthy backlogs and resilient demand. Markets tend to discount changes in capital allocation long before analysts revise earnings estimates.

The challenge from here is that there isn’t an obvious catalyst.

Hyperscalers are unlikely to materially reduce AI investment because the strategic stakes are simply too high.

But if funding costs continue to rise, investors may demand greater discipline on returns rather than rewarding capital expenditure alone.

Markets await this week’s FOMC, to assess the path of monetary policy.

For now, I think the AI trade is becoming less about technological innovation and more about who can finance that innovation most efficiently.

What do you think? 🤔 Comment your thoughts. 👇

$SPY Open digest 7/24:

After dropping hard for two days, the market is showing sluggish price action with modest bounces here and there.

Given the last trading day of the week, we aren't looking for any major moves; however, we could see some action in the gamma afternoon.

We sold at-the-money put credit spreads just to test the waters and plan to square off the position by noon. Not financial advice.

$SPY Open Digest | 23 Jul

Today's open presented exactly the type of environment premium sellers look for.

The overnight gap lower pushed implied volatility higher, creating elevated option premiums across the front end of the curve.

Rather than chasing direction, I focused on monetizing that volatility.

Near the opening lows, I established several out-of-the-money put credit spreads, taking advantage of inflated downside premium while maintaining defined risk.

As the market recovered and attempted to retrace the opening gap, I gradually layered in call credit spreads at higher strikes.

Combined, these positions formed a series of iron condors, allowing me to sell volatility on both tails while positioning for intraday mean reversion.

The thesis remains straightforward:

I don't expect an expansion in realized volatility to justify the premium currently embedded in options. If the market continues to rotate within today's range, time decay should steadily work in favor of the position.

Rather than concentrating exposure at a single strike, I distributed risk across multiple call spreads to reduce adverse convexity and improve overall portfolio management.

At the time of writing, the trade is developing as planned.

If market conditions remain stable, I'm comfortable allowing the positions to decay toward expiration. If realized volatility begins to exceed expectations or the risk-reward profile changes, I'll reduce exposure and manage the book accordingly.

Professional options trading isn't about predicting every move. It's about identifying when implied volatility overstates the risk that's ultimately realized, then structuring defined-risk positions to capture that difference.

Not financial advice.

Every beginner option trader thinks it’s easy to sell premiums on cheap stocks & make money forever.

There’s a huge flaw in that assumption.

Wheel strategy only works when you understand the balance between price and fundamentals.

Cheap stocks are not automatically good wheel candidates.

Most fall into small-cap territory with frequent, severe drawdowns. That locks premium sellers in for months or longer.

Here's the problem:

Covered calls must be sold at or above your assignment cost basis. If the stock drops hard (common with small caps), you're stuck selling mediocre premium. Sometimes under 1% even at 60 to 90 DTE.

Your capital is locked in the shares. You're waiting for the stock to climb back to breakeven so you can finally exit the position. Your best bet is to pray for those shares to get called away hoping sold covered calls ends up in-the-money.

And every good trader knows one thing:

HOPE is not a strategy.

Before running the wheel on any name, ask:

• Does the company have stable revenue and margins?
• Can it survive a downturn without cutting the dividend or diluting equity?
• Is the options liquidity deep enough to avoid wide spreads?
• Would I be comfortable holding this stock for 12 months if assigned?

If the answer to any of those is no, the premium is not worth the risk. Run the wheel on quality names trading at temporary discounts, not junk that happens to be cheap.

We are writing a framework to teach exactly this in quick & bite sized lessons.

Let us know in the comments 👇 if you want.

We’ll send a free copy of our flagship book on options income “The Way of Option”.

$SPY Open Digest for 7/22: