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Mar 29

Commodities Roundup: Seasonal Tendencies: The Option Seller's Ace in the Hole

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If there has ever been a more controversial, misunderstood, overregulated, in and out of vogue tool for "forecasting" certain commodities prices, it is seasonal tendencies.

There was an author that came out with a book several years ago that made himself semi-famous overnight by publishing a series of cant lose commodity trades based on seasonal tendencies. For those out of the know, seasonal tendencies refers to the price of a certain commodity moving in a certain direction during a certain time of year.

This gentleman was big for a few years. He got himself some TV appearances. Started publishing a newsletter. Had a few high profile calls on the market. And then, everybody found out that you could lose trading commodities. And the whole phenomenon faded pretty quickly. People stopped paying attention to seasonals.

Seasonal Price tendencies often develop as a result of certain commodity "events" that happen at the same time each year.

All of this, of course, is a shame for the investing public. For this was a clear case of throwing the baby out with the bathwater. Used correctly, seasonal tendencies can be a powerful tool for commodities investors. I felt them so important that we devoted two full chapters to seasonals in The Complete Guide to Option Selling.

The good news is that seasonal tendencies are still alive and well in the commodities markets and available to anyone that wishes to interpret their compelling data. No, they are not perfect. But they cannot be discounted as a major fundamental factor in almost any commodity market. In fact, I often use it as a starting point when analyzing new option trades.

Seasonal tendencies do have their drawbacks. First and foremost, past performance is not indicative of future results. Just because it happened last year, or even the last 10 years, doesn't mean it's going to happen this year. Season tendencies are just that, tendencies. This means prices have, in the past, tended to move in a certain direction during a certain time of year. However, there are no guarantees as to what point in that time period prices will move, how far they will move, or if they will even move at all. There are no promises made that prices will not spasm sharply in the opposite direction than they are supposed to move, right before aligning with a seasonal tendency.

It is true that commodities "seasonals" have their limitations. However, it is my guess that the difficulties of seasonal analysis are more of a problem for futures traders than option sellers. Futures traders have the burden of having to pick market direction and have nearly perfect timing. This makes trading futures contracts in line with seasonals more difficult.

For option sellers, however, seasonal analysis can pack a more powerful payload. As if you need more reasons to sell options, option sellers are not burdened with the responsibility of perfect timing, they can withstand short term moves against their position and they are more than willing to wait for a move to occur. After all, as an option seller, you have all the time in the world.

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Commodities Roundup: Seasonal Tendencies: The Option Seller's Ace in the Hole

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