It is observe that market like to remain in narrow range neither uptrend nor downtrend. Such scenario is term as sideways market. In such phases traders make huge losses due to aggressive positions. See sideways market indicator. Thus check How to trade sideways trend. For more details how to avoid sideways market. And also see best range trading strategy.
Sideways market strategies
You find so many articles suggest to avoid trading during sideways market. With help of some trading options traders can not only safeguard their gains. But also increase their profit potential. Here are some basic options strategies that can be use in sideways market conditions
Short Straddle Option Trading Strategy
Short straddle is neutral strategy. It achieves profit in market that moves sideways. Straddles can produce best results. And short straddles are aggressive premium selling strategies. Where you can sell both call and put option at same strike price. Check What do you mean by home banking?
This strategy is carry out by holding short positions in both call and put. And have same strike price and end date. Thus most profit is premium collected by options. Short options trading straddle strategy can use. If you are very confident that security won’t move in either direction.
You can focus on at trade entry and make sure to keep our risk reward relationship at reasonable level. But this strategy is expose to unlimited risk. It is advice not to carry overnight positions. Also, you must always strictly adhere to Stop Loss to restrict losses.
Short Straddle Option is combination of call and put short. And it profits from time decay factor if price of security remains stable. This strategy is not advice for beginner traders. Because of potential losses can be large. And it requires advanced knowledge of trading.
Strangles Option Trading Strategy
Strangle is an options strategy. You can hold position in both call and put with different strike prices. But, it holds with same maturity and underlying assets. This option is profitable only if there are large movements in price of underlying asset. This is good strategy for traders.
By paying for both put and call options trader tries to reach out to both sides of price range. It has low potential profitability and cutting down risks. This is another option which is quite like straddle. This strangle has ability to save both money and time for traders on tight budget.
Bull call ratio spread
This strategy involves buying ATM (At-The-Money) call option. And, also sell two OTM (Out-of-the-money) call options. It is use when stock is trading at low range. So it expects to rise to certain level in short term. As you sell two call options in reducing upfront payment for position making. But risk reward ratio quite favourable. It also result in profit even if underlying stock stays stagnant or goes down.
Ratio Bear Put
This strategy is like above ratio bull call spread. It involves buying ATM put option and selling two OTM put options. It is use when stock is trading in high range and expects correction to certain level.
Traders need to be careful while entering into straddle and short strangle strategies. As risk becomes unlimited. Hence, it advises to avoid such strategies. But which may bring high volatility in term of price movement in underlying stock or index.
Finally, see long strangle option. For more details check strangle vs. straddle. Also, see sideways trending stocks. But you can check sideways stock market. Thus, you can also see how to identify sideways market.