If May Signals a Seasonal Shift, This Condor Should Fly
The old “Sell in May…” saw has risen in popularity over the past few years — and for good reason. Since the dawn of our current bull market in early 2009, every major correction has occurred during what The Stock Trader’s Almanac calls the worst six months: May through October. The accompanying chart shades this seasonally weak period and identifies the largest drawdown experienced within that time frame each year.
How you incorporate seasonality into your investing depends in large part on your trading style. Let’s consider how the seasonally weak period might influence an option seller.
This year, selling monthly out-of-the-money bull put spreads on the SPDR S&P 500 (NYSE:SPY) has been a veritable profit-fest for those who have remained consistent in their put-selling ventures. And yet if recent history is any indication, the bull run experienced in Q1 is unlikely to be duplicated over the next two quarters. It’s altogether more likely that the market rises to a smaller degree, treads sideways, or perhaps experiences a minor correction.
In all three of these scenarios, an iron condor strategy will provide more profitable results than continuing to sell put spreads every month.
Here’s one to get you started: Sell a June condor by simultaneously selling a June 166-169 bear call spread and a June 150-147 bull put spread for 57 cents or better. The max reward is limited to the initial 57-cent credit and will be captured provided SPY remains between $166 and $150. The max risk is the distance between strikes minus the net credit, or $2.43.