When the stock market experiences volatility, it’s easier to understand how traders make a profit. Buying a stock before it rallies and selling stocks before they lose value can lead to gains. Although it’s easier said than done, many investors know what strategies to use to profit in bullish and bearish markets. But what happens if the markets trade flat? The opportunities to profit from a low-volatility market may not be as clear, but this guide will cover some strategies you can use.
What is Trading Flat?
Trading flat refers to a stock market with prices that barely move. If the S&P 500 starts at 4,500 and ends at 4,510 three months from now with very little volatility throughout the timeframe, it’s a flat market. The 0.2% gain over three months isn’t too exciting, but investors who know how to trade flat markets can generate higher profits. Some traders look for trading patterns that can indicate a flat market and adjust their positions accordingly.
How Does Trading Flat Work?
Trading flat involves identifying assets that will not experience much price movement. Even though the underlying stock won’t budge by much, traders can still look for indicators and explore opportunities to generate profits. Still, flat markets provide fewer opportunities than volatile markets.
Understanding Different Flat Markets
The context and opportunities in a flat market depend on the type of asset you trade. These are some of the types of flat markets you may encounter.
Flat Stocks
During a flat stock market, the overall market exhibits very little price movement. While the market at large won’t see many fluctuations, sectors and individual stocks can still experience volatility during flat markets. Market indices aren’t the best choices for traders in a flat stock market.
Flat Bonds
Bonds trade flat when the buyer does not have to worry about paying accrued interest or the issuing company is in default. These scenarios can cause the bond to trade flat and give bondholders very few price fluctuations.
Flat Position in Forex Trading
A flat forex trading market emerges when traders have no positions or use long and short positions that cancel each other out. The market doesn’t present clear bullish or bearish indicators and may experience very little price fluctuation during flat markets.
Tips for Successful Trading in Flat Markets
You don’t have to wait for a flat market to start moving again to generate profits. It’s possible to make a return on your capital during these types of markets. Following these trading tips can help.
Make Long-Term Investments
Not every investor cares about short-term price fluctuations. Flat markets give investors the opportunity to accumulate assets before their prices rise. While some investments will lose value, investors can buy assets they believe will go up in value while markets remain flat.
Look for Volatile Sectors and Individual Investments
Every flat market has a few investments that break the trend. Expanding your search to sectors and individual stocks can reveal high-volatility opportunities. If you search long enough, you will find an investment with sharp price movements, even if the indices are flat.
Sell Covered Calls
Selling covered calls is an options trading strategy that lets you capitalize on flat markets. To initiate a covered call, you must own 100 shares of a stock and then sell a call. Investors receive premiums for selling covered calls, and those calls will gradually lose value as the market remains flat.
Eventually, these covered calls expire worthless as long as the stock’s price does not exceed the call’s strike price. In this scenario, you get to keep your 100 shares and set up another covered call if you desire. However, you will have to sell your 100 shares at the call’s strike price if the stock’s price exceeds it.
Capitalize on Slight Movements
While flat markets don’t generate the same excitement as volatile markets, these markets still fluctuate. It isn’t too exciting if a stock stays between $101 and $102. However, traders can still profit by selling shares as the price gets closer to $102 and then repurchasing when the stock gets closer to $101 per share.
Grow Your Portfolio in a Flat Market
Investors can grow their portfolios in flat markets. These markets give opportunities for investors to accumulate more shares, and you can also use options trading strategies to maximize returns. Every market presents opportunities, and doing your research can help you find investments that align with your portfolio objectives.
Frequently Asked Questions
Do you trade flat at the end of the day?
You can trade flat at the end of the day. Some stocks yield a $0.00 net gain at the end of the day. It’s your choice whether you want to hold your shares in the after-hours or exit the position.
What does bond trading flat mean?
Bonds trading flat means the prices don’t fluctuate as much. The buyer may not be responsible for accrued interest, or the issuer may be in default.
Why do stocks trade flat?
Stocks trade flat because bullish and bearish investors have equal footing. Investors have several reasons to be bullish or bearish in these flat markets, but the market remains indecisive.
About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.