S&P 500 INDEX (SPX), Trending Stock Report

There are two seasonal patterns at work today. Both were made known by Norm Fosback. The first is called the turn-of-the-month seasonality. This pattern says that the market tends to move up on the last two trading days of the month plus the first 5 days of the following month.

The second seasonal pattern tells us that the market tends to move up on the last trading day before a holiday. Both seasonal tendencies combine to tell us that the market will likely move up today.

How do we trade based on this strong seasonal tendency? We’ll use our favorite limited-risk, high-probability strategy. The good news is that as of this writing, the S&P 500 INDEX (SPX) futures are down in pre-open trading. Why is that good news for us? Because it could help us get a good price on the SPX options we would like to sell.

This Volatility Term Structure chart shows the implied volatility of the at-the-money options for each expiration. This very normal looking term structure tells us that market participants are not too worried about big moves in the shorter-terms. The low correlation of stocks in the S&P 500 could be keeping the movement of the index small. That’s good news for index option sellers.

Two strong seasonal tendencies, and low correlation of stocks in the SPX index give us confidence that we can attempt a put credit spread on the index today, if we can get the right price. With SPX futures down as of this writing, we may be able to get filled at a good price.

Keep in mind that there are a few things going on that could help or hurt us today. First, there are some economic reports due this morning. GDP at 8:30 am ET and Personal Income and Outlays at 10:00 am ET could potentially move the market as investors try to anticipate Fed action on interest rates. Second, many investors are checking out today for the holiday. As liquidity dries up the market will likely slow down.

The great news is that with our favorite high-probability strategy, trading SPX options that are European-Style, Cash-Settled, we can enter our trade and walk away knowing our risk is limited and there is no threat of being assigned shares. To get the specific details and prices on today’s trade idea, be sure to read today’s ODDS Online Daily Option Trade Idea.