Just like the seasons in which flowers blossom in the spring, torrential downpours come in the summer, the leaves change in the fall, and snowflakes fall in the winter, there are patterns that exist within the stock market that recur year after year.

For example the Santa Claus rally usually takes place during the last 5 trading days of the year and the first 2 trading days in January. This time period has averaged a 1.4% gain since 1969. If Santa fails to appear this usually portends a bear market.

One of the most famous and consistent patterns is the so called “January Effect,” in which small cap stocks have outperformed large cap stocks 41 out of 43 years. The run up generally begins in mid-December and most of it ends by mid-January.

Then there is the January barometer in which the first 5 trading days of the year act as a gage for how the rest of the year will turn out. This has been a very effective tool in which the last 36 times the first 5 days have been up has led to gains for the year 31 times. The average gain in each of the 36 years has been 13.1%.

In nine out of the last fourteen post election years the S&P has shown a loss during the first five days of January, six of which resulted in a full year’s loss of 11.1%. This leaves five post election years where there were gains during this period. One of these years ended up being a loser, but four of these years the average gain was 22.6%. So investors should watch the first few days of January closely.

There are other things one can take a look at when examining yearly patterns. For example the days before and after certain holidays generally show a tendency towards bullishness. Under the democrats markets usually show bigger gains than when republicans are in power. The last two years of a presidency have been substantially more bullish than the first two years, with the third year showing an average of a 10.6% gain and the fourth year a 6.7% gain.

When considering seasonal patterns one should never rely on these alone for taking trades, because unusual events like war, acts of terrorism, and acts of God can disrupt these patterns. However when combined with with technical and fundamentals these patterns can act as a road map for decision making in the markets.

For example, let’s say you are in a butterfly spread and the market trends up and hits your adjustment point. So what kind of adjustment do you make?

Well, when trading options, it’s important to follow the volatility chart as well as the price chart. For example, if the underlying is trending up, it’s most likely that the vols are going down (but not always the case). So, when putting on your adjustment, why not put on an adjustment that benefits from falling volatility? (eg. a negative Vega adjustment).

Likewise, if the vols are rising, you might consider putting on a “positive vega” adjustment.

In conclusion, there are many ways to neutralize the Delta position of your options spread. So when comparing your adjustment possibilities, remember to analyze the volatility graph to choose the best Vega adjustment at the same time. Videos on this topic and others can be seen free on my website. www.sjoptions.com