How The Holidays Impact Options Markets: Navigating Market Dynamics With Cboe

In the U.S., the end of October signals the start of holiday shopping deals. While Thanksgiving,  Christmas, Black Friday and Cyber Monday are front of mind for shoppers, they also carry implications for traders. 

Options Trading During The Holiday Season

During holiday periods, market participation usually declines due to early closures or traders taking the week off. For example, during a holiday week, volatility is expected to be lower because of reduced activity from both institutional and retail traders. As noted by Russell Investments, U.S. equity volumes typically fall to 80% of typical volumes the day before Thanksgiving and to roughly 45% the day after Thanksgiving, which is a half-day session.

Specifically, regarding derivatives, as noted by Russell Investments, over the past decade, global futures and options volumes in late December have averaged 40% below normal levels. When fewer participants are active, trading volume decreases, which can lead to wider bid-ask spreads. This reduced liquidity makes opening or closing positions more challenging and may impact the pricing of options contracts.

Insights Gained From The Holiday Season 

While the holiday season is a time for celebration, it also offers insight into consumer spending and the broader economy. The shopping activity around Black Friday and Cyber Monday can indicate the financial health of the American economy. The health of the economy is a key concern for many business owners, especially given recent events. With many large firms, such as Amazon (NASDAQ:AMZN) and UPS (NYSE:UPS), implementing massive layoffs, broad economic impacts can be expected. Specifically, consumers may be more cautious with their spending and more vigilant about where they can get value for their dollars.

According to the University of Michigan's consumer surveys, consumer sentiment decreased by approximately 6% this November, driven by a 17% fall in current personal finances and an 11% drop in expectations for business conditions over the next year. The reported sales activity from Black Friday and Cyber Monday will be especially important for consumer sectors of the economy.  The following week, options traders might focus on consumer discretionary and consumer staples sectors, as companies like Amazon, Walmart (NYSE:WMT) and Target (NYSE:TGT) tend to attract market attention during this time.

Options Trading During The Holidays: Things You May Want To Consider

For individuals trading options during the holidays, there are some actions to  consider:

i. Given the reduced level of volatility, options traders should consider reducing their trading size or focusing on highly liquid names where spreads remain tighter.

ii.  With the consumer consumption sectors being a primary beneficiary of holiday shopping activity, traders can capitalize by looking for opportunities where implied volatility is reduced before the holiday season. Then, traders can benefit from rising volatility or a directional change occurring.

iii. Given the shortened trading period and reduced market participation, traders should carefully consider the positions they are in, especially if they require them to exit quickly, as reduced liquidity is expected in the market.

Navigating The Holiday Season With Cboe

Cboe offers a diverse range of products that market participants can use during the holiday season, enabling them to adjust their market and risk exposure to align with their trading objectives.

Given the reduction in market volatility during the holiday season, opportunistic options traders might sell weekly Cboe Volatility Index (VIX Index) options to collect premiums. Selling these weekly options – usually via call spreads or iron condors – allows traders to earn premiums that decay rapidly due to the shorter trading week. However, the strategy carries tail risks: unexpected news can quickly cause the position to decline. 

As mentioned earlier, the holiday season is a key period for the retail sector of the economy. If a trader has a directional outlook on sales activity for the season and anticipates how the market might react, S&P 500 Weeklys^SM Options would enable them to act on their perspective quickly.

Finally, if traders want to adopt a company-specific approach to their options trading, they can use weekly options. This can allow them to take short-term positions on particular market events such as upcoming news about sales activity during the holiday season. 

Learn all about Cboe's offerings here.

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This post contains sponsored content. This content is for informational purposes only and is not intended to be investing advice.