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The three-day Labor Day weekend is coming up, and as usual, low volatility before a holiday weekend is making trading harder than it usually is. Low volume is compounding the challenge.
This quiet time follows seasonal summer trading patterns, marked by wild, jagged price moves that spin traders’ heads around and around. We think a stock should go up, and it suddenly gets hammered. Or maybe an index moves lower before rising swiftly like a phoenix from the ashes.
But here we are with both low volatility and volume. If many traders are away from their desks, the news is quiet, and/or stocks and indices are priced right, it may see there is little advantage to trading.
Low volatility before a holiday weekend is tough to trade
Low volatility, especially in front of a holiday weekend, is tough to handicap. It’s like the markets are boats bobbing in the harbor. There is some movement, but not much to speak of.
Normally, low volatility means the markets are rising. But the only movement we will see this week will appear on Friday. Without getting too complicated, selling volatility the day before a holiday is a normal activity for options and stock traders. If you have premium, take it. With an extra day of decay for options to lose their value, there’s no waiting around.
The good news is that lower volatility before a holiday weekend means option prices are relatively cheap. When the market doesn’t expect big moves, options sellers need to reduce the price of puts and calls to attract buyers.
Plus, the week ahead of a holiday weekend have historically been bullish, so there will be great trade opportunities. Keep on eye on the charts and technicals to find some good set ups, especially on Friday.
Looking ahead to the start of September (and the last third of the year), be mindful of sharp moves in the market. This low volatility won’t stick around for long.
Related: How To Handle Pullbacks When the Wall of Worry Is Up