Much has been written about seasonal patterns in the financial markets. Some months and particular days of the month have a tendency to exhibit more bullish behavior than others. In addition, certain sectors and industries may have specific times of the year when they consistently catch “bull fever.”
This time of year, you might want to get a flu shot for your portfolio so you aren’t susceptible to any of the fevers and other syndromes in the air!
Thanks to the ease with which we can crunch numbers and discover historical patterns from seemingly random market movements, forecasts abound for what the market should do on any given week or month. It’s not difficult to find data. The challenge, for many traders, is using it to make (or at least preserve) money.
In my early trading days, I purchased a copy of the 40th Anniversary Edition of the “Stock Trader’s Almanac,” which offers up a plethora of historical trading patterns. It was my first exposure to in-depth analysis of market history, and reading it was at times like drinking from the proverbial fire hose.
I’ll save you some time and give you what I’ve found to be the most-important lesson any trader can learn. And that is this: Lest you think seasonality is foolproof, however, remember the ubiquitous disclaimer that “past performance is not indicative of future results.”
Like stock prices, volatility also exhibits forms of seasonality. Perhaps the most predictable is the tendency for volatility to nosedive heading into Christmas and New Year’s.
This year was no exception as the CBOE Volatility Index (CBOE:VIX) has thus far dropped 25% since the beginning of December. Those who heeded the holiday volatility swoon by entering short volatility strategies earlier this month have likely made out like bandits.
Given the rapidity with which volatility has deflated, some interesting opportunities may be in the offing. Some stocks have seen implied volatility drop to levels not seen in many, many months. Examples include Home Depot (NYSE:HD), Wal-Mart (NYSE:WMT), General Mills (NYSE:GIS) and Visa (NYSE:V). When volatility ebbs this low, two realities become increasingly apparent:
1) Option-selling strategies (where you collect premium at the outset of the trade) like covered calls, short puts, credit spreads and condors largely lose their appeal because options have become so cheap.
With much of the upcoming holidays and shortened trading weeks already being priced into option premiums, the effect of time decay through the end of the year will likely be negligible.
2) Option buying strategies (where you pay to enter your trades) like long calls or puts, straddles and strangles become increasingly appealing.
If you have a strong bias on a stock and are looking for a leveraged way to exploit the directional move, now could be a great time to snatch up options since they’re offered at bargain prices.
At the time of this writing, Tyler Craig had no positions on any of the names mentioned.