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How to trade in sideways market using options

How to trade in sideways market using options

Historically it is observed that market like to remain in a relatively narrow range. Neither uptrend nor a downtrend and we call it as flat or dull market. Further such scenarios are generally called as sideways market. It could also mean the market with less volatility. So during such faces most of the traders tend to make huge losses because the market is not moving. It is predominantly due to the aggressive positions. Most importantly it is due to lack of knowledge on how to tackle these kinds of flat markets.

Now with options you get lot more flexibility because you can capitalize if market is just moving sideways. So, it can be possible by selling option premium, there are a few different strategies that are getting more complicated. Option selling is like selling insurance. For example, if you buy health insurance then you have pay premium continually. That means as you progress your life, you must constantly pay for it. This is because you as a person will deteriorate over time. So if you buy insurance premium when you are 70 or 80 it’s going to be extremely expensive. It won’t be if you buy when you are 20.

This is what option premium works. Following are the option strategies you can use in sideways market:

Calendar Spread:

Here you are selling option premium in the near month and then you are buying protection in the next month. So that’s what you are doing with premium because in the near month is going to deteriorate quicker. This is like an 80 year old person will approach death much sooner than someone when they are 15 year old. Further here you are selling near month and taking protection for next month

Short Straddle:

This neutral strategy is designed for low volatility conditions where stocks are not active, and you can collect a premium. So here you can sell both call and put options with the same strike price and the same expiry period.

Short strangle:

With this strategy you are going to look for a steady or flat trading stock and slight movement up or down. It’s not going to be strategy where you need the stock to really be flat, zero return, no movement at all. In this you are going to simply sell a call. Also you will sell a put with strike prices that are slightly out of the money for same expiry period.

Bull call spread:

This is a bullish strategy to sue when there is 2 or 3% upside moment in the underlying stock. The difference in this type of spread is there is no excitement of this stock. So, you are going to substitute one of your upside potential by long call option. Later sell an out of money as call as well. Here you are going to sell some of the upside potential for opportunity to get back some of your premium. So, it’s going to be cheaper strategy overall, but this could help to give some upside potential.

 

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Comments

Shruti Dhakonia
4 months ago

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