When it comes to options trading, several types of strategies can offer different levels of risk and reward. Some options trading strategies are only profitable in specific market conditions, but others are highly profitable regardless of the stock market’s activity.
An advantage of trading options is that they can provide profits in a wide variety of market conditions. In particular, several strategies can be highly profitable when the stock market is quiet.
A good starting point is to consider buying call options when you believe the stock price will rise and buying put options when you think the stock price will fall. It’s known as a long position, and it can be profitable when the stock market is relatively stable.
Another common strategy is to sell call options when you believe the stock price will fall and sell put options when you consider the stock price will rise. It’s known as a short position, and it can be profitable when the stock market is volatile.
A long straddle involves purchasing both a call option and a put option on the same underlying security strike price. Depending on movement within an underlying security’s price range up until the expiration date, significant profits can be generated with this type of strategy. The maximum potential loss occurs if the underlying security is at the strike price at expiration.
A short strangle entails selling both a call and put options on the same underlying security but at different strike prices. This type of strategy profits when the volatility of the underlying security is low, and the difference between the two strike prices is more significant than the premium received for selling the options. The maximum potential loss occurs if the underlying security is at either strike price at expiration.
Protective puts are used to provide downside protection to an existing long position in a stock or ETF. To establish a defensive put position, you would purchase a put option with a lower strike price than the stock’s current market value or ETF you already own. If held until expiration, the protective put would expire worthlessly, and you would keep your underlying stock or ETF position. If the stock or ETF falls in price below the strike price of the put option you purchased, the put option will become active, and you will sell your shares at the higher strike price. It would limit your losses to only the premium paid for the put option.
When you take a short position, you expect the price to fall. It means that for this technique to be profitable, the stock must end up below the put options’ strike price after they expire. For example, if you sell 100 put options with a $20 strike price, and their expiry date is one month, this strategy only becomes profitable if the shares fall so low that they are worth less than $20 per share. If they rise above $20 per share before expiry, this will result in losses.
One final options strategy which can be highly profitable when there is little movement in the stock market is calendar spreads. With this strategy, call or put options are bought or sold at different strike prices but with the same expiration date. It can be profitable when there is little movement in the stock price, as the options will all expire simultaneously, and any gains or losses will be offset.
This article has only scratched the surface of the many options strategies that can be profitable when the stock market is quiet. However, it provides a good starting point for those looking to take advantage of this market condition.
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