Sell (Options) in May and Go Away

Many investors have heard the phrase “Sell in May and go away”. But the question is: Sell what?  Often, traders consider this trading idiom only from an equities standpoint. That is, sell stocks in May and get back in the game after the summer. The rationale for this logic is that the summer months typically see lower volumes and, therefore, lower liquidity.

There is logic to the wisdom of avoiding trading in lower-liquidity environments. But, because there is historically less trading in the summer, volatility in the equity market is lower, historically, as well. For option traders, lower volatility means opportunity.

Income trades are a family of option trades that profit in low-volatility environments. Income trades are also referred to as “option-selling strategies” because they result in a net selling of option premium—that is, usually they result in a credit to the traders account and they have the quintessential characteristic of a short option position. This characteristic is defined by positive theta – time decay is good.

Option-Selling strategies include: credit spreads, iron condors, butterflies, time spreads, covered writing, selling cash-secured puts and more. When traders expect the market to be stable, it is a prime time to put these strategies to use.

Sell in “May and go away” relates the historically successful opportunity for option traders who implement these option-selling strategies going into the summer months. Selling in May allows traders to cash in on the low volatility expected between May and September. Non-option traders who sell their equity investments and stay out of the market for the summer months miss out on potential opportunities on which clever option traders can profit.

2 Comments
Dan Passarelli

Dan Passarelli is an author, trader and former member of the Chicago Board Options Exchange (CBOE) and CME Group. Dan has written two books on options trading — "Trading Option Greeks" and "The Market Taker's Edge." He is also the founder and CEO of Market Taker Mentoring, Inc., a leading options education firm that provides…

  • http://twitter.com/OptionGenie OptionGenie

    Too bad lower volatility isn’t a surprise to traders and market makers, Dan. Options already price in the lower expected volatility when selling the summer months’ expiry options. I am an Income Trader and sell options. I also disagree with your statement regarding, “For option traders, lower volatility means opportunity,” for how you used it. Decreasing volatility would make more sense for your reference. An already low, or already expected lower volatility provides less opportunities for premium sellers.

  • Miltiadis

    higher volatility is an opportunity for premium selling..in a low environment everything is a 50/50 bet. Volatility always revert to the mean and the historical mean is 20 , compared to 13 implied volatility which SPX currently trading. the most idiot strategy is to sell premium at these levels,cause if there is an increase in vol would be very difficult to manage your position. Even if you sell a call in SPX is so cheap that is not worth it at all !!!