Understanding And Taking Advantage of Monthly Seasonality of Options Trading

If you’re new to the world of options you’re probably a little confused by the monthly seasonality patterns that occur in options trading. Is short seasonality of options trading is the “historic” or “average” price patterns of options during different time periods in an option expiration cycle.

Since we know that each year has 12-monthly cycles, most option expiration cycles have 4-weeks durations. Each of these weeks has very different characteristics that can help a trader select strategies that will take full advantage of that week’s historical tendencies.

Okay so here’s the big picture on monthly seasonality…

Historically, the beginning and end of the month, as well as the week (mid-month) leading up to options expiration have been bullish, and the time in between, bearish. Visually this could look like a “W”.

Clearly the biggest benefit you can get from this chart is the ability to now enter end exit trades at more favorable times during the month. However you have to remember a couple of key characteristics of options in general as well. First and foremost is monthly time decay or THETA.

A classic characteristic of the last week of the option cycle is the ever increasing rate of decay of extrinsic premium. As such, even though generally options are bullish this last week, time decay can rapidly reduce profits. For this reason, option structures that benefit from rapid time decay of premium work well in the last week of the monthly cycle.

Are there other cycles besides just monthly?

Of course! Other cycles have a more slowly oscillating patterns than may not be so clear for the individual traders. Most of these happen over an annual period. Examples of such patterns would be the predictable decline in implied volatility during the summer vacation cycle and the Thanksgiving-Christmas holiday season. Even more would include presidential cycles, election cycles, etc.