Best Options Strategy In A Sideways Market

best-options-strategy-in-a-sideways-market

Best Options Strategy In A Sideways Market

 

We can easily trade when we know the direction of a particular stock.

Suppose if the underlying is in uptrend we can buy call or short put and if underlying is in downtrend we can buy put or sell calls.

But when we come to the sideways market its tough challenge to make money from options and a there is a high degree of risk especially in debit strategy (long call/long put).

Here are the few strategies though which we can get a decent output.

  • Short strangle (credit/non-directional)
  • Iron condor (credit/non-directional)
  • Short straddle (credit/non-directional)
  • Iron butterfly (credit/non-directional)

All of these are called as non-directional strategies which are used in sideways market.

Now a question comes in mind why 4?

All of them have different characteristics based on the market conditions.

Short Strangle and Iron Condor can be used when we know the upper and lower range in which underlying is going to be range bound based on demand and supply or support and resistance or through another technical analysis.

short-strangle

Short Strangle is used when the market is sideways and we are expecting the price to be remains range bound in upcoming days. The strategy can be initiate by selling a call and a selling a put (Both Anchor Units). The call strike which we select to sell should be at or above the upper range, similarly the put strike should be at or below the lower range.

iron-condor

As we can see Iron Condor is slightly different from Short Strangle.

Adding two offset units into short strange will give us Iron Condor.
The major benefit for Iron Condor is now our risk is also limited.
The Offset Units strike price of long call (+CE) should be above the short call (Deep OTM), similarly strike price of long put (+PE) should be below short put (Deep OTM).

Short Straddle and Iron Butterfly can be used when we are pretty much confident that underlying is going to be remain at around current market price only, that can be analyse through the our Trading in the Zone course or through any other technical analysis.

short-straddle

Short Straddle is used when the market is sideways and we are expecting the price to be remains around current market price only in upcoming days. The strategy can be initiate by selling a call and a selling a put (Both Anchor Units).

Both call and put should be of same strike price and same expiry

As long as price remains around current market price and as long as days pass, the strategy will count money for us.
Please not there is an unlimited risk characteristics in Short Straddle

iron-butterfly

Iron Butterfly is the modified version of the Short Straddle, in which two offset units are added to prevent from unlimited risk, one is long call and one is long put.

Long call strike price should be deep OUT-THE-MONEY above the upper range, similarly long put should be deep OUT-THE-MONEY below the lower range.

Anchor unit will be same like Short Straddle (same strike and same expiry).

Which strategy is safer:-

Obviously the strategy which prevent from unlimited risk is more safe.

Iron Condor and Iron Butterfly are the safe strategy, which will prevent us not only from unexpected gap up and gap down but also prevent us from a sudden hike in implied volatility.

Summary:-

Since all are the credit strategy. As long as market will remain sideways, these strategies are going to count money for us. But the implementation of these strategies should be based on Implied Volatility.

If Implied Volatility is extremely high Short Strangle and Short Straddle are the best strategy.

If Implied Volatility is high but not super inflated then Iron Condor is the best strategy.

If Implied Volatility is neither high nor low means it is mid-point (68 % time according to 1 STD) then Iron Butterfly is the best strategy.

 

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