It’s time to sell in May and go away! Or is it?
Calendar anecdotes are not ironclad rules. Seasonal factors can play a role in your trading success, but your odds may only be slightly better than a flip of a coin. This is especially true when you’re trading options.
Options are contain only two components: intrinsic value and time. An option may not have intrinsic value, but it always has time – until it expires. So in essence, following a calendar anecdote could offer you great opportunity to make money or it could lead to a disastrous outcome.
Let’s focus on the opportunity, as we clearly want to avoid the disaster.
Sell in May and go away?
Sell in May and go away came about because it kicks off a six-month period that historically has poor results. If everyone believes this is true, doesn’t it become a self-fulfilling prophecy? In some cases, yes. If you knew the market would underperform during a period of time, you would probably not participate.
Other calendar anecdotes, like the Santa Claus rally and first five days in January tend to have mixed results, but people follow them religiously!
That seems to be the case for “sell in May and go away” as well.
Since 1945, the period from November through April in the SPX 500 is higher by an average of 6.7%. Meanwhile, the period from May through October is only up about 2% on average. That of course is not the case every year, but an 80 year track record is pretty solid. If you were to avoid that period and simply came back in November, chances are your returns would stack up higher.
Many investors follow this anecdote and actually do perform well. But if you’re a long term investor or options trader, you should probably ignore the signpost. Simply use any weakness to add more stock.
For options traders, you can still find great trading opportunities to the upside and downside. Follow the technicals and charts, and make informed, rational trading decisions. You can make money in any market – or time period – if you follow what the markets are telling you.
