5 High Probability Options Trades For May

When I first started trading, I ignored the Dow Jones Industrial Average and its ETFs (DIA) because – after all – why would I limit myself to the 30 most popular stocks? But now, as an options trader, I find myself almost limited to those stocks that are most liquid. Because of this, I’ve looked into many aspects of this index, including the seasonality of its components.

DIA is not without problems. Not only is it unevenly weighted in favor of high-priced stocks, but its overriding idea – that it measures the health of the US economy – is likely flawed. For this reason, investors eyeing the DIA as a portfolio component would be well advised to pick apart the ETF’s holdings and look at each stock individually.

I am a huge fan of seasonality. Many readers scold me for “attempting to time the market.” But statistical patterns are real, and “this time is different” are the four most expensive words in the English language.

Consider the following:

Dmon table

What you’re looking is the table of “rankings.” I derived the rankings by running over each stock for the past twenty years and tracking the number of positive months for May. Larger numbers are better for the stock’s prospects.

The fundamental basis for a certain company performing well or performing poorly in May differs. Interestingly, this is not a sector seasonality phenomenon, as evidenced by – for example – one credit card company American Express (NYSE: AXP) performing reliably well in May and another Visa (NYSE: V) performing poorly. We see this again with banks – JP Morgan (NYSE: JPM) a “hold” in May; Goldman Sachs (NYSE: GS) a “sell.”

The driver of each stock’s seasonality is best left to in-depth fundamental analyses on each individual stock. For now, we want to focus on a general portfolio-building. Based on these rankings, you could easily build a portfolio of more intelligently weighted DIA components. I leave that up to you; for this article, I merely want to look at the most extreme results of this ranking and provide an options trade on the stock.

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