For this post I want to continue to elaborate on the idea of my first entry, that volatility is relatively cheap right now so it is a good time to be a buyer of options. The idea I will present here is still fairly rough, but the basic premise is as follows: a long/short trade where I have screened for the underlying securities mainly based on seasonality data. Good seasonality should mean that the stock will outperform the market, regardless of direction and poor seasonality underperform regardless of direction – this, in theory, should allow the trade to yield some alpha. Additional return might be realized if volatility picks up as well.
For the long side, I ran screens looking for stocks with good march seasonality and some other factors: ~80%+ months up with 5%+ average return on as many data points as possible, good fundamentals and trading around its 20DMA and 50DMA. For the short side I used: ~75% months down with 5%+ average loss, poor fundamentals, trading below their 20DMA and 50DMA and over 250k shares traded a day. On the short side I also favor companies that will suffer from rising commodity/fuel prices. Additionally, to increase the probability of success I have tried to exclude stocks which can be news driven – think pharmaceuticals – as well as momentum stocks that have been on a tear – I feel uncomfortable chasing or shorting the momentum.
After some preliminary work, these are the stocks I am taking a closer look at:
Long: ADBE, CM, QCOM
Short: GOL, INAP, IAG
I will post some charts with what I am looking at for entry points later this weekend, some seasonality data, my favorite setups as well as any other gems I come across – currently looking at some Canadian companies as well. But for now I must prepare for March Madness with the gentlemen of the PPT.
Thanks for reading, feedback is welcome and appreciated.