How To Trade In Sideways Market Using Options

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Looking at the history, it has always been observed that most of the times the stock market remains to be in a relatively narrow range which is neither an uptrend nor a downtrend. This is the situation which we call as ‘sideways market’. During ‘sideways market’ phases, most of the traders tend to lose huge money. This happens as a result of an aggressive position and more because of the absence of the knowledge on how to deal with these market conditions.

There have already been a number of write-ups where it has been advised that in these situations or during the sideways market, one must avoid trading. But it is also true that if we use right options trading strategies, the traders will not only end up protecting their profits but may also get substantial profits in the end.

Some of the basic options strategies that can be used in sideways market conditions are discussed here to help you.

Short Straddle strategy: This is the strategy that is created by holding relatively short positions in both the call option and the put option that have the same strike price and the maturity date. The maximum profit gained is the amount of the premium which is collected by selling the options.

Short Strangle: This is yet another good options strategy to trade. It is quite like the straddle strategy. The difference is that in the case of a Strangle, there is the strike price which is created by using out-of-the-money strikes of both call and put options. A strangle can protect both money and time for traders that have a limited budget.

Ratio Bull Call Spread: In this strategy, you must buy At-The-Money call option and also sell the two Out-of-the-money call options. It is used when a stock is trading at the downside of the range and is likely to increase to a certain level after a short interval. Selling the two call options helps in reducing the upfront payment for the position making the risk-reward ratio quite easy.

Ratio Bear Put Spread: Like the Ratio Bull Call Spread strategy, the Ratio Bear Put Spread involves buying At-the-money put option and selling two Out-of-the-money put options. It is used when a stock is trading on a high side of the range and correction is likely.

It is also advised to the traders to be very cautious as they plan to venture into the strategies of the Short Straddle and the Short Strangle because the risk here is unlimited. They are also advised to keep away from these strategies in case a big event is lined up. A big event is always followed by the higher volatility in terms of price movement in the underlying stock/index.

Check out live put call ratio values on BloombergQuint.

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