After 20 Years, I’m Finally Excited to Buy Options

BY KEITH KAPLAN CEO, TRADESMITH

For many years, I’ve been “that guy” when it comes to options trading.

I’ll tell anyone I meet that buying options is usually a waste of time and money.

99% of the time, I believe selling options is the way to go.

The options selling strategies we recommend can lower your risk, have better upside when used consistently, and put the odds overwhelmingly in your favor when you use the right strategy.

That last factor is key. You’re not betting where a stock will land and when… you’re simply betting on where it won’t. Much easier.

This stance really challenges people’s worldview. Most people just stick to buying calls and puts. And I get it: It’s easier to access and thus, more popular. But if you’re not great at it – it becomes a losing game.

For me, if you’re going to buy options, you better have a significant edge. Not only that, it must be consistent.

Most traders just don’t have anything close to this.

So, for the last 20 years… I’ve seen very little to convince me that buying options consistently can outperform the market.

Today, that changes.

I’ve never believed in a single trading strategy more than this one. It’s the pinnacle of my career!

I’m finally excited about buying options.

Here’s why…

Seasonality: The Ultimate Edge for Buying Options

Here in January, we officially released a groundbreaking trading strategy to our Trade Cycles subscribers.

And one aspect of it (there are many) is a revolution in how we approach options trading.

This tool is an absolute breakthrough – the biggest since we created TradeStops 20 years ago.

Finally, the answer to buying options lies in leveraging seasonality data – but not just any generic historic average. We’re talking about a system refined by thousands of custom algorithms designed to maximize accuracy and results.

Regular readers know we’ve had our seasonality tool for a long time. It lets you look at a composite of a stock’s price action over the last 15 years, averaging out each of those years into one chart.

By looking back through time at unusual periods of price performance in the past, we can use those periods as signals to trade. And that alone is a clearer view of the markets than most.

Here’s an example with Monolithic Power (MPWR)…

In our seasonality charts like the one below, the green line you’re seeing is an average of the stock’s price moves over the past 15 years. The green shaded areas are periods where the stock produces consistent gains each year. And in MPWR’s case, those seasonal gains can be quite large:

From Jan. 6 to Jan. 21, MPWR has historically moved higher 80% of the time… and, on average, it’s gained 4.03%. Then, in the spring, MPWR has a history of more than 10% average gains. And there’s plenty more you can see above.

That’s good. It’s useful. Just knowing that should help you beat the market.

But should wasn’t good enough for us. (Especially for traders taking on the risk of buying options.)

So, we backtested seasonal signals on thousands of stocks since 2006 as a rolling 15- year lookback. That’s 33 years of data. Billions upon billions of rows of price information.

That way, we could see what actually happened when you bought these stocks during their positive seasonal windows.

And we found that even by buying all the stocks with a 100% win rate during their seasonal windows… meaning they always won at that time – for 15 straight years… well, the actual next trade result for that period of time was a win rate of 60%–65%.

Solid. You can beat the market trading a system like that.

But still not enough to justify trading options aggressively. Not good enough at all.

So, we went back to the drawing board.

And that’s where we found our real breakthrough.

Never Treat Two Stocks the Same Way

What we discovered changed everything. And surprisingly, the breakthrough aligns with a core TradeSmith mantra: Never treat two stocks the same way, period!

We had to figure out how to apply that concept to seasonality, but on steroids.

You can’t just look at a pattern repeat and apply it to all stocks. Each stock… each signature… has its own pattern.

When we were researching seasonality… testing day after day, month after month… we found that we needed two proprietary signals for each stock to make seasonality a consistent winner.

And we did it running 2.4 quintillion tests in total, using thousands of custom-built algorithms.

In the end, we finally had a tool that could identify the optimal seasonality score for each stock. That helped confirm a buy signal.

Then, to take it to the next level, we found the ideal Relative Strength Index (RSI) reading for each stock, too.

That was when we hit light speed on our breakthrough! And it’s why this strategy is so phenomenal (and even possible).

For example, MPWR’s specific RSI threshold is 70. If MPWR’s RSI is below 70 during its seasonal window, the probability of success skyrockets.

The same is true for the thousands of other stocks in our system. Each one, in fact, has a custom RSI level that confirms a seasonality trade is worth pursuing.

And when we re-ran the backtest using these new factors, we saw that this targeted approach was a game-changer. The win rate soared to over 80%… and the backtest showed major outperformance against the S&P 500 – more than double:

Now we were ready to see, “What happens if you trade these signals with options?” The answer: exponential growth.

To use just one of the best-known stocks as an example…

You could have made 205% profit on Nvidia (NVDA) in just 15 days on our signal that the stock has a “green day” on Oct. 24. That’s quite a boost to the 11.6% you’d have already made simply trading NVDA shares:

That same seasonal opportunity could have made you 152% with NVDA options in 2018…

Or 135% in 2022, once again with NVDA options, but this time in only 48 hours:

Results like these were what told me we had a true breakthrough on our hands. And this new system – with its optimal RSI thresholds, precise seasonality scoring, and unparalleled win rates – is just the beginning.

Starting this month, our Trade Cycles subscribers have full access to these tools, along with expert trading commentary and tailored buy/sell alerts.

If you’re not yet a member, I urge you to watch the replay of my presentation earlier today. It not only explains this groundbreaking system but also includes two free trade ideas.

And if you’re new to options trading or just won’t do it … watch the presentation anyway. The options strategy we built is the gravy. The full-course meal is focused on single stocks and world class portfolios. We provide our subscribers with both, for maximum flexibility.

Either way, this is the most robust product we’ve ever built.

The way we built Seasonality is a revolution for TradeSmith. It’s changed my long-held beliefs about options trading.

And with these new tools we’ve developed, you can capitalize on our data like never before.

All the best,

Keith Kaplan
CEO, TradeSmith