Hey everyone — JD here with your Rational Trader Market Analysis Daily.
Quick note today, but a really strong example of how I use the Daily Arbitrage Factor Score to pinpoint inefficiencies — and capitalize on them.
What’s the Daily Arbitrage Factor Score?
Before the market opens each day, I run a proprietary model I’ve built — something I call the Daily Arbitrage Factor Score.
It’s a blend of data points I track religiously, designed to forecast where I believe stocks should trade in the upcoming session. Once I’ve got that score, I compare it to where futures are actually trading — and when there’s a disconnect, that’s my arbitrage opportunity.
Arbitrage, by the way, just means taking advantage of price inefficiencies in the market. Same way as you might buy a guitar from one guy on one side of town for $50 and sell it to another guy across town for $100.
You’re simply taking advantage of a market inefficiency: the fact that they don’t know each other.
Today’s Score: +2, or +0.50%
This morning, the score came in at +2, which suggests we should see a gain of about 50 basis points (0.50%) across the market.
From there, I look for which index offers the best setup — and today, it was clear as day: small caps.
Specifically, the Russell 2000 (IWM) was trading flat in the premarket… despite:
- Interest rates dropping,
- Retail sales coming in strong,
- And the “prices paid” component of those sales showing clear signs of disinflation.
All of which are tailwinds for small-cap stocks.
So why wasn’t the Russell responding?
The Market’s Distracted (Again)
Well, this week’s been all about distraction. The market’s having a hard time getting over this endless wall of worry — focusing on political noise, speculation around Trump, and whether or not tariffs are coming back.
It’s inefficient behavior, which is exactly what creates opportunity for people like us.
The Trade: IWM 221 Calls
So I acted.
I bought the IWM 221 calls for $0.73 right at the open. And within 15 minutes, IWM surged — hitting my +50 basis point forecast and then some, pushing toward +100 basis points.
I sold the calls for $1.87, which locked in a 156% gain.
That alone would’ve made a great day.
The Market Flipped… And So Did I.
But it didn’t stop there.
Once IWM crossed the +1% mark, I flipped the bias and opened a call credit spread — selling one call above the current price and buying another at a higher strike.
That brought in another $0.37 in premium, all based on the same arbitrage logic, just in the other direction.
Basically since the IWM move had overshot my estimate of how far it should move, I bet on it moving back in the other direction.
Call credit spreads allow you to collect income when you believe a stock has gone too high, too fast — you’re essentially betting it stays below a certain level or is going to retrace.
The Power of the Magnet
One thing I’ve learned: we rarely land exactly on the target forecast… but that forecast acts like a magnet.
If we open below the score’s projection, I’ll often take an aggressive long — like today’s call buy. If we move above the target too far, I’ll fade it — like the credit spread I closed out later.
Either way, the arbitrage score gives me a rational anchor. It’s not magic. It’s math. And it works.
One Last Thing…
Normally I post the daily score in my FREE Telegram channel before the markets open, but I was traveling this morning and didn’t get to it. That said, you can follow me there to stay in the loop.
I’ll be back Monday with more analysis.
Take care, everybody — and as always, stay rational.
Talk soon,
JD
The Rational Trader
