December’s Seasonality Pattern

a trade idea

The market got its catalyst event with the Fed announcing that while more rate hikes are coming, they could be smaller starting in December. The interesting thing is that most investors assumed that was going to happen already. And Powell didn’t say it was going to happen – he said the smaller increases “may come as soon as the December meeting.” My point is that nothing definitive happened, but that was enough to send the Dow Industrials up over 700 points.

With the major averages still above their shorter moving averages, the question is will the December seasonality stock pattern match previous years?

December 1st is typically a down day, but if we follow the rest of the seasonal pattern, the rally should continue through about December 7th. It then fizzles through mid-month and then picks up into the end of the month.

a trade idea

Based on the chart above, investors are more willing to take on risk at the end of the year, pushing up the Russell 2000 higher than the other indices.

December is the best month in terms of historical win rate and is the third-best month in terms of average performance gains. So, will this month finish strong?

Let’s see if we can take advantage of this knowledge and find a trade idea.

Let’s start by looking at the recent sector performance.

a trade idea

Energy is still one of the best-performing sectors over three months but has been the worst relative-performing sector in the last month.

That brings us to Cheniere Energy (LNG). Over the past 28 years, LNG has risen in the next seven-week period 78.57% of the time with an average historical gain of 22%.

Yesterday we covered debit options. Today, let’s look at the credit spread.

If we believe LNG will go higher from here, but maybe we’re a little worried about the Energy sector lagging behind the rest of the market, a credit spread may be worth our time since we’re neutral to bullish in our beliefs. The trade makes money with each passing day as time decay affects the price of options and we can make money if the stock price rises.

Here’s the chart of the stock where I’ve highlighted the $170 level, which is where the 20-period exponential moving average sits and I’ve drawn a line at $165, another line of support on the chart.

a trade idea

Now, I typically want a shorter amount of time for a credit spread trade because time decay happens faster the closer we are to the expiration date, however, we’re going to set this up as an example trade for teaching purposes.

We’re going to look at the 17 MAR 23 expiration date. Why not earlier? Well, remember LNG has a positive expectancy over the next seven weeks and gets us into January. We don’t know when the potential gain will occur – we just know it happens on average over a period of seven weeks. I like to give the trade a little more time after the expected move time I’m reviewing. I also don’t like that the December puts have less than 100 in open interest.

There’s no February expiration, so that’s why I went out in March.

If we sell the 17 MAR 23 $170 put and buy the 17 MAR 23 $165 put, you get a risk profile that looks like this:

a trade idea

The max profit potential is $185 and the max risk is $315. I’d look to take profits at 50% or more of the max profit and I’d set a mental stop if the stock crosses either below the 50-period moving average OR if the stock falls below the $170 put that you sold.

This doesn’t mean I’d choose this over a debit spread, but since the Energy sector is lagging right now I wanted to show how you can take a neutral to bullish outlook and use the time decay of the options to your advantage.

If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008

Jeff Wood

Editor, Filthy Rich Dirt Poor
Coach, Options Testing Lab

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