I would like to share with you one useful trick for the stock market. This is particularly important at this time of the year because now is the right moment to implement the trick in practice. It is useful for a short term speculation, but not necessarily for an investor, who has a long-term plan. So let’s get to it.
Understanding the ins and outs of the stock market
There is one important factor that has an influence on the stock market and needs to be considered. That is to know how the big players act. The heavyweights in the financial markets are those who manage the largest amount of money. These are pension funds, hedge funds, funds of funds etc. Basically, they have the economic power to move the prices up or down. All of these are run by professional asset managers. There is one significant difference between professional asset manager and private trader or investor. Guess what? The professional managers need to report her or his performance to the owners whose money they manage.
So what happens at the end of the year. The managers are well aware that after the year closes and they need to prepare a report on their performance, many questions will be asked. These questions might sound: Why did you not invest in the technology sector? It has grown 33%! Has your fund grown 33%? Has Apple (AAPL), Alibaba (BABA) or Nvidia (NVDA) been in your portfolio. They run extremely well.
Hence, what the managers usually do at the end of the year, be it November or December? They start buying stocks that performed extremely well this very year so that they can proudly announce that they were invested. At the same time, asset managers will dump stocks that under-performed the market so they do not have to explain to many people why they still own stocks that decreased in price. Once we know this, we can use this fact to our advantage.
Knowledge is not enough, one needs to use it to reap the benefits
Those of you who have already read a few articles on Premium-Flow, you know that I am an option seller. Option sellers do not try to predict where the price will go. For me, it is enough to say where the price will not go. That makes a big difference.
Therefore, it is often for me a good idea to sell some put options, in November or early December, on companies that performed well in this particular year. When selling put options, I effectively say that the price of the stock will not decrease too much. Some good candidates for this year were mentioned above, i.e. Apple (AAPL), Alibaba (BABA) or Nvidia (NVDA) etc. As I said at the beginning, this tactic is suitable for short term traders or option sellers, not for long-term investors. As an option seller, one might choose options with expiration date between 30-40 days.
In parallel, now, it is not the best time of the year to speculate that under-performing companies will recover. Neither speculating on a decline. If you are a short seller, do not bet in December that well-performing stocks will decline. I mean, it might happen, but this is not the right time to do it, if you like to have probability on your side. Usually, stock market climbs up in December. The psychology might also help when everyone has a good mood and looks at everything with enthusiasm.
Combining the bits and pieces for a successful option selling
Certainly, there might be factors that have even stronger influence on the stock market. This pattern might not repeat every year, but this trick is another piece of the puzzle when making a trading decision. Such pieces, when combined, will benefit our trading.
I hope that you liked this post. Do you also have similar tips and tricks, everyone can use?
Let me know in the comments below and see you next time.