"July 4th follows a pattern every trader should know." Nate Bear, Lead Technical Tactician, Monument Traders Alliance Time decay is an option buyer's worst enemy. Every day eats away at your gains. That's why I took some quick profits on my T-Mobile (TMUS) call options today in Profit Surge Trader: You see, while markets tend to float higher into a holiday, the ranges aren't very wide. And just because markets are closed doesn't mean time decay stops. With volatility at its lowest level in months, I can lose on call options even when I get the direction right! Holiday trading is a special situation with its own unique characteristics that can create some really interesting opportunities. That's why I've got something special for you all today. We're going to explore some statistics and trends around holidays. These backtested ideas can help us identify edges we can use to enhance our trades. So, let's start by discussing what REALLY happens around holidays. How Holidays Work Wall Street is notorious for its churn and burn environment. It's not uncommon to put in 100-hour weeks from the head honchos down to the lemmings. So, when holidays come around, the NYSE becomes a ghost town. It's commonly believed that volume dries up on the days leading up to holidays since trading is left to the algos and retail investors. But that's not always the case. Take a look at this daily chart of the SPY with the volume at the bottom. The yellow line is the 50-period moving average. I've drawn white arrows to denote the days before the holidays. In some cases, the volume is below the average. However, that's typically limited to the immediate day before. Go back multiple days, and you will find volume well above the average. Like everything else in the market, it all depends on context. Take the end of 2018 as an example. Volume was enormous as traders panicked over a premature Fed rate hike. So, what's the real story? Holiday Bulls In the immediate days before major holidays, markets generally trend higher. And the day before the 4th of July is no exception. Going back to 2000, if you bought the open and sold the close of the SPY on the day before the 4th of July holiday, you would win that trade 62.5% (15 out of 24 times). To give you a sense of the edge, if you bought the SPY at the open and sold the close, an average day would win 52.5%-53.0% of the time. So, the idea that markets float higher into holidays is accurate. It holds true for most holidays, including Thanksgiving, Christmas, and Memorial Day. Now, that wouldn't be much of an edge if the losses were so big they outweighed the wins, giving you a profit factor of 1.91. A profit factor is the total wins divided by the total losses (where both numbers are positive). On average, you would win about 0.116%. Setting Up to Trade These statistics are tied to the SPY. However, they generally hold for most major market indexes. On the other hand, individual stocks can play by their own rules. However, when you have half days and/or low-volume days right before a holiday, most stocks tend to rise. The trick is knowing how to exploit this situation. Conservative Trader If you're looking to just play the statistics as they are , the simplest way is to sell a 0DTE put credit spread with tight strikes at or just out of the money on the SPY or the XSP, which is the cash-settled version of the SPY. So, if the SPY were trading at $546, you could sell the $546 put that expires tomorrow and buy the $545 put with the same expiration. This should give you a net credit of around $0.45-$0.50, which you keep as long as the SPY finishes over $546. At the money spreads will usually give you close to a 50/50 risk reward. Since we know the win rate is above 50%, taking this bet over and over should turn a profit. The Simple Trade If you want to keep things extra simple, just buy a small amount of the SPY at the open and set a sell order for the close. This ensures you play the statistics and allows you to size the bet accordingly. The Leveraged Trade For those of you looking to kick it up a notch, call options on the SPY can be a great way to play this idea. But, instead of going with 0DTE options, look for expirations that go out 3-5 days. For example, this Wednesday is the day before July 4th. Expirations for Monday or Tuesday of next week are ideal. You'll still aim to sell them at the close. But you can always take a profit on a large chunk while leaving a little bit to run. | 
No comments:
Post a Comment