Happy Holidays to all of you!
While it is always exciting to have a little break around the holidays from the normal weekly routine, I don’t like to take much time away from the markets. The good news from trading the options markets is we have many strategies that we can use for any type of market condition.
This includes the slower holiday markets that we typically see this time of year.
I had numerous questions come in last week from traders asking how we plan on trading the stretch between the Christmas and New Years holidays. We will take a look at our holiday trading approach in more detail below.
Holiday Trading Tips
Keep in mind if you prefer to take the time off around the holidays and come back early January to hit the ground running we are perfectly fine with that approach. That is an approach that we have taken in years past. However, with all of the uncertainty around the pandemic, the latest stimulus plan, and with markets are historic extremes we plan on staying active right through the end of the year.
With a few adjustments to our normal routine there is still money to be made between now and the end of the year. Let’s outline a few key points to keep in mind when trading a holiday shortened week.
1. Be Careful With The Expected Low Volume
We will typically see a drastic drop off in trading volumes during a holiday shortened week. We have already started to see volumes dip that last few weeks even before the holiday trading. This is due to markets being so extended on the upside. When looking at the S&P 500 ETF (Symbol: SPY), we typically like to see 80-100 million shares trade on a daily basis. Of late it has been a struggle to hit 70 million shares.
The average daily volume on SPY has gone from 100 million shares back in June and July to down around 73 million shares currently. This lower trend will continue going into next week.
Markets are only open until 1:00 eastern on Thursday and then closed all day on Friday. We have a short window Monday and Tuesday next week to get new trades on. Once we get into Wednesday’s session we can expect volume to dry up pretty quickly.
If you are going to look for new trades next week, the earlier in the week the better. Monday and Tuesday will be the best days to get your trading done for the week. We plan on reducing the size of our trades by 25-50% over the next 2 weeks as a way to adjust to the lower expected trading volumes that we will see market wide.
2. Expect Tighter Intraday Range
Along with the lower volume, we can expect tighter intraday range as well. Once you get past the first hour of the trading day, we will most likely see slower movement. We have already seen the daily ATR (Average True Range) on SPY move from over 7 in early November to down around 4 currently.
Even before the holiday stretch, we have been experiencing slower trading conditions during the day. This will only tighten up more going into the next few weeks. We will talk in a moment how this will impact which options strategies we decide to use. It’s important to take what the market is giving us instead of trying to force the market to do something it isn’t set up to do.
For example, placing trades with long calls and puts using weekly options is not the highest probability trade during a holiday week. The time decay can jump up and bite you if you aren’t careful. With the lower volume and tighter range that we typically see, there are much better strategies that will provide better odds of success.
3. Place Your Orders During the First 90 and Last 60 Minutes Of the Session
Liquidity could be hard to come by next week so be picky with the time of day that you are looking to trade. We will have the best volumes during the first 90 minutes and the last 60 minutes of the session. These are the best windows for getting fills at good prices.
Next week it will be import to take a picky approach with your orders. I would rather get filled at a good price or not at all. It’s very possible that we will need to adjust the prices that we look to get filled at. In most markets, I like to place my options orders at the mid price between the bid and ask prices. That could be a challenge next week with the expected slower conditions.
We will most likely have to adjust our buy orders higher away from the mid price and adjust the sell orders lower away from the mid price. We want to keep the adjustments small but making these small adjustments should provide a better chance of getting filled on trades.
4. Use More Credit Spreads With Monthly Options
We all love to use long calls and long puts as they can provide the big profits with the potential for instant gratification. While we are ok with this approach in some market conditions, the holiday shortened weeks are not the best markets for that style of trading.
We prefer to use more credit spreads during the holiday weeks as they will provide a higher probability of success. They will allow us to put the time decay in our favor. We can make money from every day passing instead of having that time decay hurting us like it would if we are buyers of options.
The credit spreads will also allow us to lower the risk on the trade. When using spreads, we are typically able to lower the cost of the trades by 30-60%. This along with cutting our position sizes by 25-50% will allow us to stay active while keeping our risk lower during the slower trading conditions.
We also plan on trading more January monthly options. While the weekly options will move faster, they also have lower liquidity when compared to the monthly options. We would much rather go where the better volume and open interest is at. The January monthly options will have much higher volume and open interest which will make them easier to get good fill prices with.
5. Trade A Smaller Watch List Of Products
For most of the year, we preach taking a diversified approach with our trading. We want to trade a mix of strategies on a wide range of markets including individual stocks and ETF’s. During the holiday weeks we take a detour from this approach. We would rather focus in on a smaller list of products that we know have good liquidity. This will make it easer to get in and out of trades quickly and at good prices.
Using a smaller list of products will also cut down on the amount of prep work required to find good trade opportunities. While many of us love being active in the markets on a regular basis, watching slow markets around the holidays is not all that appealing. If we can track a smaller list of stocks and ETF’s and cut down on the amount of screen time that we are using to track our trades that will be a better choice.
Here is my holiday watch list of products that I plan on trading through the next few weeks. I am selecting this list based on factors like having good liquidity in the options, having attractive chart patterns, having a history of good two way movement.
- Apple (Symbol: AAPL)
- Tesla (Symbol: TSLA)
- Facebook (Symbol: FB)
- Citigroup (Symbol: C)
- Electronic Arts (Symbol: EA)
- Microsoft (Symbol: MSFT)
- Netflix (Symbol: NFLX)
- Advanced Micro Devices (Symbol: AMD)
- Baidu (Symbol: BIDU)
- Chevron (Symbol: CVX)
Exchange Traded Funds (ETF’S):
- S&P 500 ETF (Symbol: SPY)
- Nasdaq ETF (Symbol: QQQ)
- Russell 200 ETF (Symbol: IWM)
- VIX ETF (Symbol: VXX)
- Gold ETF (Symbol: GLD)
- Utilities ETF (Symbol: XLU)
- Retail ETF (Symbol: XRT)
- Bond ETF (Symbol: TLT)
- Emerging Markets ETF (Symbol: EEM)
- Financial ETF (XLF)
While there are many other names that can show up in the headlines over the next few weeks, we prefer to focus on a narrow list of names that have been most active of late. This will allow us to stay active without having to spend hours a day focused on markets.
The next 2 holiday shortened weeks are not a time to swing for the fences. We fully expect January to be a very active month with a pick up in volatility which will give us the opportunity to ramp up the risk if we want to.
There is still opportunity over the next few weeks as long as you temper your expectations. We plan on staying active but in more conservative way. Use smaller risk and higher probability options strategies and you can still generate some income as we work through the slower holiday trading conditions.