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‘Sell in May and Go Away’ Does Not Apply to DayTradeSPY’ers

As traders, you will no doubt encounter the adage “Sell in May and go away.”

This is one of the most well-recognized trading strategies espoused by investment gurus, whereby you take advantage of seasonal tendencies by selling your equity portfolios in May, only to buy them back in the fall. Its origin dates back to old England, when stockbrokers would go on summer vacation and return in October, after the final horse race of the season happened on St. Leger’s Day.

The strategy gained credibility among investors and traders, given the number of infamous market declines that typically occur between May through October. “Black Monday” happened in 1987, the post-Lehman Brothers crash occurred in 2008 and the market correction resulted in August of 2011 due to the downgrade of the U.S. government debt rating. These events only reconfirmed the validity of the saying. Maybe there’s something to it, maybe not.

This is a behavioral bias, but studies show that over long periods of time, buying and holding produces better returns than selling in May and returning back in the fall.

Now, here’s the thing: “sell in May and go away” does not apply to DayTradeSPY’ers.

We don’t care if the market is up or down. We can make money in either direction, and during either bull or bear markets. By trading options based on the S&P 500, the top 500 stocks in the United States, we have the ability to pursue anticipated short-term trends in either direction.

Markets do not move in straight lines. Instead, they zigzag — at times trending up, other times trending down. I sometimes almost feel guilty knowing this, as I can use the market’s nuances to make money virtually at will. I sometimes almost feel like it should be illegal. In fact, if most everyday criminals knew about our strategies, they may reconsider their lawbreaking activities in favor of making money legally using our programs.

By focusing on very short-term breakouts, and by using fundamental analysis combined with technical techniques, we can anticipate where the SPDR S&P 500 ETF Trust, SPY, will go. The stock does not have to move very far for us to make money. For example, if the underlying stock moves only $0.50, with a delta (the relationship between the stock and the option) of 0.50, that means that the option will move $0.25.

That may not sound like much, but consider that such an option may cost you only $2, or $200 for a single contract. A $0.25 move on a $2 contract is a 12.5% gain that’s oftentimes returned in a few minutes or even seconds.

If you bought 10 contracts costing you $2,000, your return in the above typical example would be $250. Many of our Trading Room participants are in and out four times a day, earning $1,000 on the same $2,000 investment, usually before lunch. That’s $250,000 a year.

Pie in the sky? Not at all.

Is it simple? Yes.

Is it easy? No.

The complications come from how your emotions react with market gyrations. Very short-term ups and downs can wear down even the most seasoned trader. It can be very emotionally grating on your nerves to watch your equity rise and fall like a rowboat on the open seas during a storm. The challenge comes in controlling risk and managing your emotions.

And that’s where we come in. Investors looking for passive long-term gains can worry about the seasons. They can settle for gains of 5% per year on money markets; we don’t get out of bed for that.

Since learning to trade, I lost all interest in the “long term,” the translation of which reads “I have no clue where the market is going but if I wait long enough, you will either make money or forget about the whole thing.” Instead, I enjoy making a little money today, tomorrow and the next day. For DayTradeSPY’ers, “long-term” is when the market closes at 4 p.m.

Our way of making money on the market is enhanced by the fact that it is also exciting and fun. There is something very rewarding about beating the S&P 500 in its own game.

Do you want to know more? Join us Sunday night at 8 p.m., ET, for our weekly Introduction to Options Trading/Week in Review. Click here to register for this enjoyable, interactive fireside chat.

If you are already familiar with calls and puts, please join us in our daily Trading Room. Click here to subscribe.