We’re just a few weeks away from the start of this year’s Santa Claus rally – And I’m not talking about the mythical, jolly man putting presents under the tree.
The Santa Claus rally is real – and there are 74 years’ worth of statistics to prove it.
In almost every December since 1945, the S&P 500 rose nearly 1.5% — advancing in price 73% of the time.
This movement sets the market up for a pattern that I look forward to every year – and this year comes as no exception.
The Santa Claus rally extends from the first trading day after Christmas to the second trading day of the new year – December 28, 2020 to January 5, 2021 – and it’s shown time and time again to be profitable.
This year, in fact, I’ve discovered a trade with the potential to return 150% before the new year is a week old.
You can thank Santa’s Christmas-spun market rally for this one…
How to Profit on This Start-of-the-Year Pattern
The Santa Claus rally has occurred 65% of the time over the past 74 years for an average return of 1.3%.
Now, for novice traders, those numbers might not mean much. But here at Power Profit Trades, we’re pattern traders – and those numbers are the key to playing this rally.
Let’s put this in real terms…
Say you were to buy the SPDR S&P 500 ETF (NYSE: SPY) on December 28th of this year and sell it on January 5, 2021 – you’d have a 65% historic probability of making 1.3%.
I think we can all agree that’s nothing to write home about.
Now, even with the increased return on investment (ROI) from options contracts, you can estimate the return by multiplying the historic ROI by 10 – meaning you’d receive a 13% return.
Not bad, but we can do better.
The fact that we know the S&P 500 tends to rise during this time means that we can take the top stocks from this index to find an edge. And we can amplify this edge by picking stocks that historically move up during this period.
Over the past 10 years, the following five stocks have consistently outperformed the general market during this period of time:
Now, each of these stocks carry a pretty hefty price tag. All are trading anywhere from $230 to $1,320, so buying them would be too expensive to fit into our trading rules.
Given that we’ll be in these trades for a little over a week, there’s no need to dance with the stock. Buying options are dramatically cheaper and generally magnify stock returns by 10.
For example, let’s take a look at CMG. Over the course of last year’s Santa Claus rally, CMG gained 4.4%, while the broader S&P 500 notched just 0.7%:
Taken from finance.yahoo.com.
Based on historical data like this, CMG makes an ideal candidate to play this year’s Santa Claus rally.
As I type, a CMG two-week $1295 call option is trading at $34 per share controlled. For one contract, that’s $3,400. So, instead of investing $129,500 to buy 100 shares of CMG at $1295, you’d only need to spend $3,400 for the call option.
||$1,295 = $34 per share
|X 100 shares
Of course, this is dramatically lower, but it gets even better – we can reduce the cost even more dramatically using spreads. All you have to do is sell a higher-priced call option in addition to the call you bought.
Selling a CMG two-week $1305 call will bring in $30 – or $3,000 for one contract – reducing our price per contract to a mere $400.
Now, our maximum profit for the spread is $6, or $600 per contract – that’s 150% of your entry price!
So look at that – if CMG is above $1305 in two weeks, you’ll net a 150% return – with the new year just over one week old.
Let’s break it down. Here’s all you have to do on December 28, 2020 on any or all of the stocks above:
- Buy a January 8, 2020 Out-of-the-Money (OTM) call option (a strike or two higher than stock price).
- Sell a January 8, 2020 call option 10 points higher than bought strike.
- Close the call spread at the close of market on January 5th, 2020.
As always, you want to manage your portfolio and keep track of your trades. There are events that could drop the market during what is usually a bullish time, so exercise caution. Use stop losses on positions after they lose 50%.
This Santa Claus rally will start your new year off on the right foot, so take advantage of this play to get ahead of the crowd.
And fortunately for us, the Santa Claus rally isn’t the only spike in the markets you can practically set your watch to…
My Weekly Cash Clock trading system crunches millions of data points to predict which stocks are about to jump based on years of trends. The best part is that you can trade these jumps for a shot at huge profits in just four days or less!
Click here to learn how this incredible system works, and how you can get on board.
America’s #1 Pattern Trader