Dear Reader,
This time of year, I like to trade an incredibly reliable pattern that can help take some of the stress out of the holidays by putting money in your pocket again and again.
Over the long term, this strategy has proven incredibly lucrative – in both bull and bear markets – and can now be employed 11 times every single year.
That’s 11 chances to profit on a little-known pattern that emerges around major U.S. holidays.
I call it the “Holiday Weekly” trading strategy.
And today, I’ve got a special guest – Chief Seasonal Analyst, Jay Harris – to show you exactly how it works and how you can use it to line your pockets before Labor Day.
Click on the video below – and let’s get started…
Holiday Weekly Trading: The Basics
“Holiday Weekly” trading is exactly what it sounds like: trading around the holidays.
You see, most people feel more optimistic around the holidays, which tends to triggerbullish sentiment in the market. It’s true for any number of reasons: the usual Christmas cheer, the thankfulness around Thanksgiving, or simply the fact that a holiday gives an extra day off of work, a reason for many to be happy.
In my experience, the markets tend to trade higher starting the two trading days before the holiday, and ending on the close of trading the day before the markets close for the holiday.
So to stay one step ahead of the crowd when trading through the holiday period, you should enter your trade two days before the holiday and be out at the end of the trading day prior to the holiday.
Now, we’re talking about relatively small stock moves that happen incredibly quickly – an increase of just a few points in two days or less.
So we want to make sure that use the right investment to take full advantage of both the timing and the trade.
The best strategy for trading around specific holidays is to buy a weekly call option. You can also open what I like to call a “Loophole Trade” – or call spread – to further reduce your cost and risk.
These special options are only available on the biggest, most liquidsecurities. They expire once a week, every Friday.
This powerful investment vehicle gives you incredible leverage andat the same time allows you to maximize the value of your investment in a very tight window of time.
That makes it the perfect way to take advantage of these short-term holiday trades.
Now that you know the basics, here are the four steps to building your holiday trade…
Step 1: Pick a holiday
There are 11 specific U.S. holidays that have long-term bullish patterns worth trading around. These are:
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New Year’s Day
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Martin Luther King Jr. Day
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President’s Day
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Memorial Day
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Juneteenth
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Independence Day/Fourth of July
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Labor Day
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Columbus Day
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Veteran’s Day
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Thanksgiving Day
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Christmas Day
With each holiday giving you a two-day trading window, that’s 22 days out of a year that are tradeable. Over the past 50 years, trades on the Dow Jones Industrial Average on just 8 of these holiday patterns days have generated more than 500% growth.
But we have something much more liquid in mind for this pattern…
Step 2: Choose your underlying asset
My favorite asset to use for this pattern is the SPDR S&P 500 ETF (SPY). This is one of the most liquid – if not the most liquid – instruments traded onthe New York Stock Exchange.
Over the long term, this tradingstrategy works becauseyou’re only in the marketsfor 22 typically bullishtrading days a year.
Still, there is considerable risk here, enough to make simply buying SPY shares undesirable. Instead, by buying weekly calls on SPY, we can limit the risk in the event that we enter in the middle of a market free-fall and the market doesn’t rebound in the two trading days the strategy allows for.
Step 3: Choose your options
When planning a holiday trade, map out on a calendar when the holiday is, when to enter the trade, and when your options should expire.
As with any Weekly, your main concern will be time decay. That’s why for holiday trades, I like using a special exchange-traded fund (ETF), which is highly liquid, and slightly in-the-money (ITM) options, to hedge off the time decay risk.
Remember, a call option is ITM when the underlying stock price is higher than the exercise price. A put option is ITM when the stock price is lower than the exercise price. In other words, an option is ITM when you can make money upon exercising it.
Trading Weeklys on the SPY allows you to play the upwards movement of the markets without having to get lucky on a particular stock. My goal on this holiday trading strategy isn’t to get a double, but I will try to get a reasonable return by trading weekly call options with a delta of 0.75.
We’ll talk about the Greeks in the near future… For now, an option’s Delta tells you how much the option’s premium will move in response to the underlying asset’s price moving by $1.00. For example, if your option has a 0.75 delta, then on the next dollar move higher by the underlying asset, the option premium should move higher by $0.75 ($1.00 x 0.75).
I like Deltas of this size because they allow the option to move more like a stock, and with a Delta of 0.75, you have cut your time-decay risk in half.
Step 4: Know when to enter and exit your trade
Remember, for the best results for your holiday trades, enter the trade in the morning two days before the holiday, and exit on the last hour before close prior to the holiday.
As for exit targets, if the SPY moves enough to generates a double in your trade, be prepared to exit half (50%) of the trade for a 100% gain, and keep the remainder to capture any additional gains. At this point, you’ve eliminated all risk by fully recouping your initial cost, so as long as you manage the sell the other half of the position for anything, that’s a profit.
Selling half of the position once it has doubled is often called a “free trade,” precisely because the remaining position is “free” of risk.
If the trade doesn’t double, you should still see a nice return on it. In fact, in a lot of instances I close the Weekly holiday position because of the time stop, which I set to close the trade before the close of market on the last trading day of the pattern.
Good trading,
Tom Gentile
America’s Pattern Trader