big Market pullbacks often surprise and Crush investors and Traders who tend to panic and sell the lows in this video our head of options trading shows you a strategy that allows you to profit While others Panic I'm Mike Bella Fury and we're one of the top proprietary trading firms located in New York City since 2005 and proud to have developed numer 7 and even eight fig perear Traders we hope you agree that you have found the right place to learn hi I'm Seth freyberg head options Trader here at S&B capital and one of the themes
that options Traders are aware of in the market is the seasonality of the market from month to month and so those of you who follow this kind of thing realize that the worst month of the year historically for the stock market is right now September and options Traders actually all professional Traders realize that there's money to be made in both bullish and bearish markets and so the best Traders have a playbook for both kinds of markets and so what we're going to be teaching you in today's video is one of the best strategies for profiting
from seasonally bad months like September so if that sounds of interest to you then stick around because I think you're going to find this pretty eye opening before we get into the option strategy that we're going to be teaching you in today's video if you're absolutely brand new to options trading and don't know much about how options work we've put together a special video for you to understand options Basics and if you click the video appearing on your screen right now it it will lay the groundwork for you to understand the option strategy that we'll
be sharing with you in this video Then when you're finished you can come back and watch the rest of this video as we mentioned September is historically the worst month of the year as you can see from this table derived from the Dow Jones Market data but if you look closely at the same table you'll see that once September's over historically the remaining months of the year are actually positive and in fact December is one of those bullish months of the year which some people refer to as the Santa Claus rally and so there's actually
an option strategy that can beautifully take advantage of this Market tendency so let's take a look at how this strategy works and how it would have performed in recent years so let's head back to September 1st of 2021 and as you can see 2021 was actually a year pretty similar to this year in that spy stock which represents the basket of stocks that comprise the S&P 500 spy stock was extremely bullish pretty much all year and in fact had closed at its all-time high on September 1st closing at 4188 that day so suppose that we
pulled up a spy stock options chain expiring at the end of September on that day at at the close and look for a put option right below where the market had closed which in this case was the 450 put and we bought that put for 558 and then we moved to an options chain that expired on the last trading day of the the year that the December 31st options chain and we went ahead and sold a put option that was located 10 points lower than that at the 440 strike and that one sold for 1317
well if we did that buying a put in one options chain and selling a put lower than that on a later expiring options chain if we do that we're entering into what options Traders refer to as a put diagonal spread and as you'll see this strategy is uniquely designed to handle these September swoons followed by a Santa Claus rally at the end of the year and so let's first delve into the cash flow implications of this strategy and starting with that December put that we sold well sold for 1317 and remember that each put contract
represents 100 shares of spy stock so you multiply that by 100 and so that actually brings in $1,317 but then remember we bought that $450 put option for $ 558 and so that cost us $558 leaving us with a total of $759 in positive cash flow when you enter this trade you have to make sure that you'll have enough cash in your account so that by December 31st the Market's traded lower that you'll be able to afford the 100 shares of spy that you're going to be assigned at that 440 price so you have to
be aware of that okay so let's now first move to the day the 450 put that we owned expired and as you can see spy had actually sold off quite a bit from early September following its historical pattern closing at 42914 that day and so if you look at the value of that spy put you'll see that it's worth 2139 which makes sense because if you exercise that put you'd get to sell 100 shares of spy for 450 even though it's trading about 21 points below that at 42915 so the right to sell those shares
at a price of 21 points higher than they're really worth is obviously a very valuable rate and therefore trades for about 21 because if you exercised the shares you could immediately sell them for 21 points higher per share so that's a logical value for that put and so if we went ahead and actually sold the put at that point here's where our cash flow would stand on the trade and it is now up to 2898 because we've added to our initial cash flow the proceeds of selling that September put okay so now let's move to
the end of the year to see what happens with our December put and as you can see the Spy had rallied to$ 47496 and so the 440 put that we had sold expiring in December obviously just expires worthless right and I say that because there obviously is no value to the right to sell your shares at 440 when they're trading trading 39 points higher up at 474 496 that rate expires with no value at all meaning that when we move to our final profit calculation now that all the options are expired and we can assign
a value to the whole trade in light of the fact that the 440 put expired worthless we simply pocket the cash we've collected so far on the trade which as you can see is the initial cash flow from entering the trade combined with the increased cash flow after we sold that long 450 put at the end of September resulting in a final trade profit of $2,898 and so now I think you're starting to see the theory behind this trade we buy a put that will take advantage of the typical September selloff and we sell a
put a few strikes down which is almost always going to be trading at a significantly higher price when we sell it because even though it's below the put strike we bought it expires 3 months later which is a long time in the market versus the one we bought for September which expires just a month later and so the market will almost always pay you a lot more for that December option than you had to pay for the September option expiring much sooner and so you end up collecting cash just entering the trade and you end
up making more cash by cashing in on the September option at a profit if the stock does indeed sell off in September as it historically tends to do okay so let's now move to the next September September of 2022 and as you can see that year was a completely different story with the Spy selling off all year and by September 1 it had dropped below 400 closing that day at 396 42ff you again bought a spy put right below where the Spy was trading at 395 expiring at the end of September and sold one 10
points lower at 385 expiring at the end of December your cash flow would again be positive this time creating positive cash flow into your account in the amount of $640 as you can see from the calculation we'll now move to the day the September option expires on September 30th and as you can see the September selloff struck again with the stock selling off pretty much all month and closing at 35718 that day and so just like in the previous example from 2021 the put we bought is going to be very valuable given that its strike
price is about 37 points above where the stock is trading at expiration and so we can cash that in for 3768 resulting in updated cash flow of 4,448 for the trade now this time something interesting happens when we move to the end of the year and that is that while there was a bit of a Sanda Claus rally as you can see with the Spy closing at 38243 having bounced from its September 30th price it still closed below that 385 December put that we sold closing at 38243 as you can see and so with the
stock trading at about two and a half points below the put strike price to close the trade we'd have to pay 252 to close out our short options position in that put but that's not the end of the world really because even with that cost as you can see we made so much money on the initial trade cashow plus the cash coming in from selling off that September long put option for a profit that we originally bought that results in a trade profit which is still over $4,000 4,156 so even with the stock trading below
the short putut strike price we still made a very handsome profit on the trade and so moving forward to last year 2023 as you can see spy bounced back strongly in 202 23 and by September had rallied back up to 45119 and so we'll again enter into a put diagonal this time long the 450 September put and short the 440 December put bringing in in this case $348 and once again moving to the end of September we again experience a weak month with the Spy closing at$ 42748 and so we again have a situation where
the September put which is expiring has a strike price that's around 22 points higher than where the stock is trading and so we sell that for 2281 and thus when we update our cash flow on the 2023 trade we'll see that adding the proceeds of that September put option sale as it was about to expire adding that to the original positive cash flow of the trade the total positive cash flow at this point is $2,629 moving to the final day of this trade which is the end of the year as it was in the previous
trades we can see that after selling off further into October the Spy bounced and bounced hard rallying all the way to 47531 by the end of the year and so obviously the 440 put that we own expires worthless and so when we tally up the results of the 2023 trade because there was no cost to close that short put as it expired worthless we just keep the profit from selling the September long put Plus the original positive cash flow for a final trade profit of $2,629 some of you may be thinking well hey this is
great but what about those cases where by December the market ends up well below the short strike of the December option and the answer is actually simple in that case as well you take assignment over the 100 shares at a price equal to the short strike of your December short putut and you wait for the bounce in the market which has historically always come and then you can either hold those shares which is retrospect you have acquired at a bargain or sell them off for a profit at some point during that inevitable bounce on the
other hand you may be thinking hey wait what if the market doesn't sell off in September but rather rallies through the end of the year and never has that September Swoon well that's okay too because you will still make a profit on the trade as long as the market closes above the December short putut in which case both the short and long options will expire worthless and you'll make the original credit as your trade profit so the truth is that this trade is even more robust than the examples that we gave you in this video
and that's because you initially receive a credit for putting the trade on so both options expire worthless resulting in a profitable trade and so what I'd like you to take away from today's video is that there a way to make a great deal of profit by simply recognizing the seasonality of different Market months and setting up a strategy like a put diagonal to take advantage of that pattern Pro options Traders understand these relationships and these patterns and benefit from their knowledge of options trading to match the right strategy with the right Market pattern now if
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