The Hottest Stocks to Trade This Summer

"Sell in May and go away," goes the old investing adage -- and if your wheelhouse is straightforward index plays, it's not necessarily the worst advice! Monthly seasonality data from Schaeffer's Quantitative Analyst Chris Prybal reveals that, since the inception of the SPDR S&P 500 ETF Trust (SPY), June and August are two of only three months out of the year where SPY's average return is negative. Plus, the exchange-traded fund (ETF) typically registers net movement of less than 1% in either direction during June, July, and August.

But it's 2018, and options trading is more popular than ever. An estimated 1.4 billion options contracts were cleared in the first quarter of 2018, making it one of the most active quarters of trading in history -- and the pace has showed no signs of slowing as we head deeper into the second quarter.

And it's no big mystery why options are so popular right now. Even during times when the broader stock market action is sluggish, choppy, or otherwise downright frustrating, call and put contracts offer a variety of ways to profit from moves in individual stocks and broader sectors. Whether your directional forecast is higher, lower, or completely sideways, there's an options strategy designed to help you capitalize.

With the infamous "summer slump" for the stock market just over the horizon, we tapped Schaeffer's Senior Quantitative Analyst Rocky White to find the best and worst stocks for the three-month stretch ahead -- along with the most and least volatile names. Whatever your risk appetite or investing goals, this roundup of hot summer trading ideas is sure to generate some money-making momentum for your portfolio.

 

3 Tips to Make the Most of Our Hot Summer Picks

First, watch your allocations -- remember, you should commit only a small percentage of your total investing capital to options trading. The beauty of options is that they require a far smaller capital commitment than you would need to trade an equivalent number of shares, and the resulting leverage makes it possible to collect gains in the neighborhood of 100%-200% with regularity.

However, the trade-off is that your option has a greater chance of expiring worthless than a comparable stock play. While it would be a fairly epic stroke of bad luck for a stock to fall all the way to zero within weeks of buying in, it's entirely predictable that a short-term options contract will expire in a matter of days or weeks -- whether the share price move has played out as expected or not.

So resist the urge to overload on options, even if -- especially if! -- you score a few big winners in a row. Remember, just because stocks are on summer vacation doesn't mean you can take a break from responsible money management principles.

Second, remember that seasonality isn't everything. In fact, some of the best trade opportunities arise when historical trends, patterns, and relationships break down completely. So just because Stock XYZ has a track record of outperforming during the summer months doesn't mean you can bank on an effortless repeat in 2018.

Instead, use the historical data below as a jumping-off point for your own due diligence. Here at Schaeffer's, our pre-trade research consists of a thorough review based on Expectational Analysis^® principles. Namely, we want to see outperforming stocks surrounded by pessimism, or underperforming stocks surrounded by optimism -- because either scenario tells us that the stock's prevailing trend still has some time left to play out before it reaches its "exhaustion" point. For a deeper dive into Expectational Analysis, pay a visit to our Options Education section.

Third, be smart about strategies. We've included some general suggestions for each group of stocks below, but the specific approach you use to trade any given stock will vary -- based on the magnitude and duration of the stock's expected move, implied volatility levels at the time you initiate the trade, and your own options trading acumen.

And don't forget -- second-quarter earnings season will kick off around mid-July. Whether you're looking to trade on expected earnings reactions (or, as we often prefer, the follow-through move after earnings), or looking to steer clear of event risk altogether, be sure to keep an eye on the calendar so you know when the stocks on your watchlist might be due for a dose of earnings-related volatility.

 

The Best S&P 500 Stocks of Summer

The table below highlights the 25 best-performing S&P 500 Index (SPX) component stocks during the June-August period. These summer standouts are sorted first by the percentage of positive returns, and then by the average return for the full three-month period. Our lookback is 10 years, and stocks must have at least eight years' worth of historical data to be included here.

In terms of bullish options strategies, the most straightforward way to bet on a stock's rally is by buying to open a call option. However, another angle to consider is the long call spread -- a particularly useful variation when implied volatility is running a little steeper than you'd like, or if there's a firm overhead price target you're expecting the stock to reach.

 

The Worst S&P 500 Stocks of Summer

The list below simply reverses the lineup above -- it features the SPX components with the lowest percentage of positive June-August returns over the last decade, arranged by the lowest average return for the period. This group of summer underperformers could once again be ripe for bearish options strategies in the months ahead -- traditional put option plays, or variations like the long put spread (or, if you're so inclined, the riskier synthetic short).

 

The Most Volatile S&P 500 Stocks of Summer

This grouping of SPX stocks takes a different approach. Rather than focusing on the direction of the stock's move, our analysis here focuses on the magnitude of the equity's historical June-August moves (as reflected by the standard deviation of returns). In other words, these are the S&P stocks that buck the broader sluggish summer trend by making bigger-than-usual share price moves over this time frame.

As such, you could be just as likely to find possible call-buying candidates on this list as you are prospective put-buying targets. Or, if you'd like to up your game, consider these names as possible subjects for a volatility-based options strategy like the straddle or strangle.

 

The Least Volatile S&P 500 Stocks of Summer

The stocks below tend to hit the snooze button all summer long, based on their low standard deviation of returns for the June-August stretch. However, that sleepy cyclical trend just might make them ideal candidates for income-generating strategies that rely on relatively quiet price action to deliver optimal results.

Depending upon each individual stock's technical and sentiment backdrop, your ideal low-volatility options strategy might be a simple sold call or put, or you could consider a lower-risk alternative like the short call spread or short put spread. Or, level up by trying your hand at an iron condor, if the timing is right!

As a bonus, these types of credit spread strategies are often ideally suited for playing periods of sluggish, low-volatility price action in broader equity or sector-based exchange-traded funds (ETFs) -- including the aforementioned SPY.