From the August 01, 2011 issue of Futures Magazine • Subscribe!

Option spreads in the dog days of summer

On Wall Street, it is fairly common for managers of large mutual, hedge and pension funds to create new strategies for their annual investment goals, followed by a rebalancing and optimization of their existing portfolios. At mid-year, around June, many investment managers will then adopt a wait-and-see approach, content to sit tight and do nothing, which can make it next to impossible to find a strong trend to trade for those of us who can't afford to take the summer off.

This can make summer trading a challenging time for stock traders as trade volume begins to decline when these major players (the sell-in-May-and-go-away crowd) go on vacation or seek distraction elsewhere.

If your strategy is based on trend identification — and many strategies are — this can create a debilitating pattern. Several traders are focused on selecting the strongest stocks that are likely to gain in an uptrend or the weakest stocks that will lead the decline amid falling prices.

Making matters worse, according to Stock Trader's Almanac, the so-call "summertime rally" is the weakest of the four seasons and is prone to end-of-month portfolio pumping where larger funds attempt to push the market higher by bidding up shares only to see them later become range-bound once again.

The consideration then, is whether to sit out summertime trading entirely or to adopt a strategy to take into account all of these factors. Thankfully, the solution to remaining financially engaged in the markets is accessible and productive.

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