Sell in May and Go Away?
You’ve probably heard the trading saying, “Sell in May and go away”. But this is often misconstrued by traders and it’s not fully appreciated for its true meaning. On the one hand, the market — anecdotally — falls during the summer months. But with all that’s going on in the market right now, do you really want to trade on supposed, slightly-statistical, historical voodoo?
Still, there is more to this cliché than meets the eye — it has some relevance beyond a bearish prediction. That is, it refers to the liquidity in the markets, or the lack of it. The fact is the summer months typically see lower volumes and, therefore, lower liquidity. And, to be sure, trading in low-liquidity environments can make it tough for options trading investors. So what’s a trader to do?
Consider an idea that reinvents the ‘Sell stocks in May’ cliché. How? Perhaps you have some options.
Option Trading During Summer Months
Because there is historically less trading in the summer, volatility in the equity market tends to decline. For option traders, lower volatility can be an opportunity — particularly for income traders. That because income trades are a family of option strategies that profit in low-volatility environments.
Exploiting Low Volatility
Income trades are also referred to as “option-selling strategies” because they result in a net selling of option premium. In other words, they typically result in a credit to the trader’s account and they have the quintessential characteristic of a short option position — positive theta. This Greek refers to time decay, the option owner’s mortal enemy. But positive theta is a great friend to the option seller as she collects premium on her trade.
Hopefully it doesn’t belabor the analogy – consider positive theta as that summer lover who brings much joy during a brief spell, even though you know you will have to say goodbye when autumn leaves begin to fall.
Income trade strategies that take advantage of option selling include: credit spreads, iron condors, butterflies, time spreads and more. When traders expect the market to be stable, i.e. slow summer months, it is a prime time to put these strategies to use. Indeed, for option traders the “Sell in May” cliché refers to the historically successful opportunity to implement these option-selling strategies going into the summer months.
Find more option analysis and trading ideas at Options Trading Strategies.
Selling options in May (and the low-volatility months that follow through the summer) allows them to cash in on the slow-trading activity that typically occurs when the thermometer tops 90 degrees.
Conversely, non-option traders who sell their equity investments and stay out of the market for the summer months miss out on potential opportunities that clever option traders exploit.
But there are some things to look out for. Though low-volatility provides unique options trading opportunities, it provides some problems too. The main one being volume (and therefore liquidity) typically dries up in the summer months in the options markets. That has an adverse effect on options bid-ask spreads.
Click to Page 2 for more ‘Options Reinvent Sell in May Cliché’