Expectations for Option Traders for the Rest of 2023

Tom Gentile

Posted in
Big Picture

By: Tom Gentile
November 3rd, 2023

5 mins read

The financial markets started this week in the green / positive. That has happened multiple weeks prior to this week, but those gains and positive starts got sold off by the end of those weeks.  The markets have been in a bearish, dare I say ‘corrective’ phase from August through October.

Welcome to this week where it started positively as I already mentioned  only to see the markets not only maintain those gains but add to them in a significant manner.

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Many Factors that can be Attributed to the Gains this Week

One thing you may hear and or read is the markets had been SO oversold going in to this week we were due for a bounce.  Ok, but how does one anticipate when – what day or what week that bounce is to be expected?

Another thing is the Fed unanimously voted to NOT raise interest rates in their meeting this week.

Not only that, but the commentary from Fed Chair Powell also hadn’t really changed from the last time they decide not to raise, and he spoke to the media.  He was considered to be a bit less hawkish.

This gave the markets a sense the Fed is done raising rates for the remainder of the year. It may still happen, and the Fed is remaining data dependent, but this sense they will stand pat for the year seems to have brought in some money that had been sitting on the sidelines the past few months.

Another item that may be speaking to this very bullish week.  Short covering or what some would call a ‘Short Squeeze’ is what some are saying happened.  This could easily be part of the why and how this bullish week came about.

Short covering happens when those that sold a security short, meaning they sold a security they don’t own.  They do this by having their brokerage firm borrow the security from another account at one price with the intent to buy it later when the price of the security drops in price to the point WHEN they buy it back or ‘Buy to Cover’ they profit the difference of what they initially sold it for and the lower price the bought to cover.

The thing is, if the security doesn’t drop and instead trades higher they start to buy to cover and that buying of the security runs its price up and it can steamroll into a run up at a more accelerated pace and amount because of all the shorts rushing to again, Buy to Cover.

Santa Claus Rally?

Don’t look or listen now, but the question of is this week’s performance the start of the Santa Claus Rally is already being asked.

This was asked on CNBC and may or may not be asked elsewhere.

Though it was a great week for the bulls, let’s remember the Santa Claus rally tends to happen in the week leading up to Dec. 25 or it happens the week after Christmas until Jan 2.  Depending who you ask.

Whichever time frame you believe, we can all agree right now is not the start time for either of those two scenarios.

The premise behind the Santa Claus Rally is the market tends to have a bullish run over that time frame leading up to or the week after Christmas.

Options Traders Temper your Bullish Enthusiasm

I am not going to say be bearish nor am I saying be completely bullish right now.

This is the first significantly bullish week we have had in months.. It is welcome to see.  Sometimes prices move to far, too fast and in too steep a fashion, that they inevitably sell off and come back a bit.

Often times due to profit taking.

If this market is truly in a bullish phase now, it may still happen that he markets scale back a bit from this weekly bullish move.

Some would call that a pause in the rally.  They will call for an expectation of the markets to go through a bit of a consolidation phase, or sideways price action.

That’s fine if that happens and this market will truly prove itself bullish if it does trade in a manner of consolidation only to continue the rally that started this week in the next couple.

Sell in May and Go Away is OVER

Sell in May and Go Away is what I call a seasonal pattern in which the premise is to not expect the markets to be too robust from May 1 to October 31.  That then suggests the more bullish move in the markets happens from November 1 to the end of April.

Guess what November 1 was 2 trading days ago and look what the markets are doing.  This may be why November is usually the best performing month of the last 4 months of the year – people have been sitting on their hands with their money from May until November and they are now deploying their investment capital.

Option traders can benefit with this knowledge in the knowing that if November is the best performing of the last 4-months, but also the last couple of months of the year tend to be bullish as well, they can lean towards bullish options strategies to focus on.

Profit Strategies Podcast

My most recent podcast can be found on my YouTube channel. Please subscribe for free to get notified when I post up my latest educational market education and outlook.

The video, which is the latest Profit Strategies Podcast with Chris Johnson, and can be viewed below:

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