The January "Defect" (19:24)

By Lawrence G. McMillan

This article was originally published in The Option Strategist Newsletter Volume 19, No. 24 on December 24, 2010. 

The “January defect” is the first seasonal trade of the year. The “system” states that the NASDAQ-100 usually falls from about the 8th trading day of January to the 18th trading day. The system’s results are shown in Table 1, in the next column.

The system has made money in nine of the last eleven years. Last year was one of the better years, as $NDX went into a swoon in mid-to-late January, and we actually held a partial position past the end of the period, gaining a few more points in the process.

In recent years, the best entry point has been somewhere on the 8th, 9th, or 10th trading day. Last year, in retrospect, the optimal entry was on the 11th trading day. To account for this, what we have usually done is to enter in two stages, at the close of the 8th and 10th trading days.

  Table 1: “January Defect” Results
Year  Optimal Entry       Profit/Loss
      (Trading Day)     In $NDX Points
1995  13th Trading Day        16
1996       8                 -21
1997      15                  33
1998      12                 -43
1999      12                 -94
2000      13                 403
2001      12                 -24
2002      8                  115
2003      9                   77
2004      11                  57
2005      11                  73
2006      8                   36
2007      8                   70
2008      9                  144
2009      8                  -33
2010      11                 124
                        Average 58.3

The 8th trading day this year is on Wednesday, January 12th, and the 10th trading is Friday, January 14th.

Position S612: “January Defect” Trade
1) At the close of trading on Wednesday,
January 12th, buy 10 QQQQ Feb puts, one
strike in the money.
2) At the close of trading on Friday, January
14th, buy 10 more QQQQ Feb puts, one strike
in the money.

For example, if QQQQ closes at 55.20, say, you’d buy 10 of the Feb 56 puts.

Plan to exit the entire trade by the close of trading on the 18th trading day, Thursday, January 27th, 2011.

We may also take partial profits along the way, so check the Hotline next week in that regard. One may use common sense as well; if profits build up, it can’t hurt to take some, since this is a short-term trade in any case.

Note that this trade is a nice lead-in to the “January Seasonal” trade that we have used for years. That system calls for a purchase of the market on the 18th trading day of January, just when the above system is exiting.

We will describe the “January Seasonal” in more detail in the next newsletter, but suffice it to say that it was profitable last year as well. Hence we plan to use both systems again this year.

This article was originally published in The Option Strategist Newsletter Volume 19, No. 24 on December 24, 2010.