From the September 01, 2012 issue of Futures Magazine • Subscribe!

The SPX/OEX 1-5 strategy

Option Strategy

Question: Is there a way to exploit the volatile September tendencies? 

Answer: The SPX/OEX 1-5 strategy

Historically, September is the worst month for equities. It is the only month with a negative average return. In addition, people are so worried about crashes in October that they start trimming their holdings in September, often prompting a sell-off. Yet, some big gains have been made in September as well, making the negative bias no sure thing. September can be a frustrating time for bulls and bears. For example, while 2011 followed the script, the S&P 500 had an extremely strong month in September of 2010 (see “Back to school sale”).

Given this history you just may want to avoid the potential September volatility, but there are strategies to exploit these tendencies. Through the strategic implementation of the “1-5 strategy,” sound hedged positions can be initiated to leave an opportunity for profit. You no longer need to fear large swings.

One-five is an advanced option strategy that exploits the difference between the S&P 100 and S&P 500 markets — thus “1-5.” What is at work here is the tendency of the SPX (S&P 500) to outperform the OEX (S&P100) in both advancing and declining markets. In other words, the SPX usually will fall faster (on a percentage basis) in bearish markets, and advance greater (on a percentage basis) in bullish markets.

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