When trading options, volatility is key. Volatility denotes how much the price of an asset has changed over a given period, and when there’s no volatility in the market, it can be difficult to make profitable trades. This is especially true when trading options in sideways markets – markets that have been in a range with little to no volatility.
Even though it can be challenging to trade in sideways markets, there are still options strategies that can be used to capitalize on neutral market conditions. Here’s a look at a few of them:
Use time decay
Time decay, or theta, refers to the gradual decline in an option’s value as it approaches its expiration date. When trading options in a sideways market, you can use this to your advantage by selling longer-dated options that have more time until expiration. Options lose value every day, so if the underlying stock price does not move much, you can exit the position for a gain.
Iron condors are a popular options strategy for sideways markets. Iron condors benefit from neutral price action, time decay, and decreasing volatility.
Sell covered calls
Selling covered calls involves writing a call option on an underlying asset that you already own. By doing this, you can generate income from the premium earned from selling the call option while also potentially benefiting from any increase in the value of the underlying asset.
Hedge your position
Hedging is a risk management technique that involves taking offsetting positions in related financial instruments to reduce your exposure to risk. When trading options in a sideways market, one way to hedge your position is by taking an opposite position in another option with similar characteristics (e.g., same expiration date and strike price). This way, if one of your trades goes against you, the other one should make up for it and help minimize overall losses.
Use vertical spreads
Vertical spreads can be used to take advantage of any slight changes in the direction of the underlying asset’s price movement while limiting overall risk exposure.
These are just a few strategies that can be used when trading options in sideways markets where there’s no volatility. While these strategies may not always lead to profitable trades, they can help limit risk and potentially generate some income even during periods of low volatility.