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.