Stocks & Commodities V. 31:11 (53): Explore Your Options by Tom Gentile

Stocks & Commodities V. 31:11 (53): Explore Your Options by Tom Gentile
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Explore Your Options by Tom Gentile

“Last In, First Out”

Want to trade options just one day a month? One of my students wanted to and was asking me about it at a recent West Coast seminar. It seems this option trader wants to trade options short-term, based on a well known — and pretty good — system that signals a bullish day in the stock market each month. That’s right, he wants to enter the market at the close of business on one day and exit the position the following trading day at the open, and wanted to know which option strategy would best fit his bullish prognosis. Now that I have piqued your interest, let me first explain the seasonal (or psychological) tendency before discussing using options as a surrogate for the asset.

First trading day of the month I first learned of this pattern from Jeffrey Hirsch, cofounder of the Stock Trader’s Almanac. It seems there is a tendency for the stock market to move higher over the first trading day of each month. Why does this tendency happen? It has long been thought that hedge fund, mutual fund, and retirement fund managers are putting money to work at the end of each month and the beginning of the following month, adding to their positions. Even if this is just hearsay, the idea alone is enough for the crowd to push money to the buy side. A push on various large-cap stocks is enough to move the index markets for that day. When does this move actually occur, how much of a move happens, and most important, how can a trader take advantage of this?

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