Having an understanding of the market’s seasonal tendencies is an incredibly important part of trading. 

So far in 2022, the major equity indices like SPY and QQQ have been uncharacteristically volatile in early January, after what was a somewhat subdued Santa Claus rally.

We’ll discuss this in greater detail later on in this update and I’ll show you where the seasonal winds are expected to lead us next.

With the QQQ taking it on the chin in recent days as the market shakes out some of the weak hands, I am exercising patience when it comes to buying.

When it comes to waiting for bullish trade ideas to fall to levels where I feel more comfortable buying, there is a simple 2-leg options strategy that was built specifically for the job, and I’ve identified a recent high flying stock that is close to entering my buy zone.

The traditional “Santa Claus rally” is a window of time studied by market researchers that stretches from the day after Christmas through the first 2 trading days of January, and these studies have shown that throughout history the market tends to perform well during this period.

As Figure 1 shows, in 2021, the market front ran this event (i.e., rallied ahead of it) pretty aggressively, which caused the S&P 500 to move sideways through much of the traditional measurement window. 

What this chart also shows is that after the first 2 trading days of January, which, again, are traditionally a strong part of the Santa Claus rally, the market has struggled.

Figure 1

As Figure 2 shows, this is somewhat uncharacteristic, as the S&P 500 has shown, on average, the tendency to be strong through the first 2 weeks of January, before weakening through month-end.

Figure 2

Seasonals are never perfect, but they have worked rather well in recent months.

This just happens to be one of those instances where there is some divergence.

I bring this up because, according to the S&P 500’s average seasonal pattern over the past 20 years, the market is due to turn weak from now through the start of February, when the index usually bottoms.

Given this risk, I want to be patient when looking to buy certain stocks, and Roblox Corp (RBLX) is one of the names I am looking to buy.

According to Yahoo Finance, Roblox Corporation develops and operates an online entertainment platform. It offers Roblox Client, an application that allows users to explore 3D digital worlds; and Roblox Studio, a toolset that allows developers and creators to build, publish, and operate 3D experiences and other content. The company also provides Roblox Cloud, a solution that provides services and infrastructure to power the human co-experience platform. It serves customers in the United States, Canada, Europe, the Asia-Pacific, and internationally. Roblox Corporation was incorporated in 2004 and is based in San Mateo, California.

I want to take a stab at an OTM credit call spread that makes sense to me in regards to a risk-reward perspective.

Let’s take a closer look…

RBLX is trading near a key support level created by the gap back in November.

In addition, this is registering as an extreme selloff as the stock falls closer to the 3x ATR Keltner band.

I am thinking this will flush out weak sellers and attract new buyers who will try to push RBLX back towards the upper resistance levels near $95.

To play this, I am sitting with this “bull put credit spread,” where I am looking to “sell to open” the 28 Jan 22 70 strike put and “buy to open” the 28 Jan 22 65 strike put, with a limit of $1.20.

When would a trader use a bull put spread?

This strategy is best utilized when a trader has a neutral to bullish opinion of a stock or ETF. 

Since the trader is a net seller and collecting a premium, the trade benefits from both time decay and rising stock prices. 

The trade is also statistically proven to provide better odds of success than many other trading strategies. 

What are the basic mechanics of a bull put spread?

A bull put spread is the easiest multi-leg options strategy to learn because it consists of one long put with a lower strike price and one short put with a higher strike price, both of which have the same expiration date. 

Since the trader is selling the put with the higher premium, a bull put spread is established for a net credit (or net amount received).

The trade profits when the value of the spread declines over time.

What’s the maximum profit potential?

The maximum a trader can make on this trade is limited to the net premium received (minus commissions).

The maximum profit is realized if the stock price is at or above the strike price of the short put (higher strike) at expiration and both puts expire worthless.

What’s the maximum loss potential? 

To find the maximum that can be lost on the trade, find the difference between the strike prices minus the net credit received (plus commissions). 

The maximum loss risk is realized if the stock price is at or below the strike price of the long put at expiration.

What’s the breakeven point of the trade?

To find the breakeven point, take the strike price of the short put (higher strike) and subtract the net premium (credit) received.

To YOUR Success!