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Best Option Strategies for Sideways or Range Bound Market

Best Option Strategies for Sideways or Range Bound Market

The stock market keeps moving in a certain direction, but it does not necessarily go upwards or downwards, it can consolidate or move sideways for many trading sessions. Such muted market movement is not suitable for trading as there is less volatility and no room for intraday traders to make options in the stock moves in a volatile or single-direction market movement.

In a sideways market, you can trade alternative techniques that may give better possibilities for buying and selling even supposing the market is walking within the consolidation segment. Though buying and selling inside the options marketplace is riskier than the cash marketplace, in case you change with the proper method it could provide you with high returns in short-time period trading. As someone said, there is a high risk there would be also chances of higher returns.

Also Read: Short Term trading v/s Intraday trading: which one is more profitable

However for different market conditions such as Bullish, Bearish or sideways anyone can use the combination of option strategies or you can say buying the combination of CALL, PUT or shares in the cash market not only gives a hedged trading position but also ensures returns. In respect of the same, in this article, we bought the best option strategies for the sideways or range bound market.

Best Option Strategy for Sideways Market

#1 Short Straddle Option Strategy

It is a simple or you can say a natural option strategy in which you have to sell one call and one put option with the same strike price and contract expiration date. In this option strategy, you can gain maximum profit from the premium you can receive while writing the option contract. You can enjoy this profit till the price of the underlying security keeps trading within the range of the strike price.

The premium you have received while selling the contract would be high, as you have chosen the at-the-money strike price contract. However, the profit under this contract is limited and that is the premium you have collected while writing the contract. Conversely, the seller of the contact can incur the unlimited loss, if the prices of underlying stock start moving away from the stock price.

How Straddle Option Strategy Works with an Example

So whenever you have taken straddle positions in sideways market first you have to be very sure about the breakeven levels. On breakeven levels any trader is in no profit state means their trading positions doesn’t make any profit or loss. In this strategy there are 2 ways to calculate BEP-

  1. BEP= Strike price - total premium received
  2. BEP= Strike price + total premium received

Straddle Option Strategy Example: Currently Nifty is trading at 22000 ( spot price) and you sold one call option and one put option at the strike price of 22000 and received the premium of 200 units.

As we said when the spot price starts decreasing, your breakeven point would be 22000-200= 21800, and after this level, you will incur the loss with unlimited possibility at the downside.

On the other hand, when the spot price of Nifty 50 starts increasing the breakeven point will be 22000+200= 22200, and your trade position will become in loss beyond this level. Hence, your trade position will be safe till the spot price of Nifty 50 trades between the ranges of 21800 to 22200.

#2 Short Strangle Option Strategy

It is the option strategy considered a neutral option strategy and in this option strategy, you have to sell one call and put an option only the difference here is the option contract should be out-of-the-money and equally away from the spot price with the same expiration date. This option strategy will save you time and money if you have a limited budget to trade.

As compare to straddle strategy, premiums are much less as traders generally sold out of the money (OTM) contracts. Moreover probability of profit increases in this strategy as long as spot index or asset traded under the prescribed range of OTM contracts.

In this option strategy, you (the option writer) will incur the loss, when the spot price of the underlying security either starts moving below the put option sold or trading above the call option sold.

In this strategy, your breakeven point will be in two conditions, first if the spot price starts decreasing (BEP=Put Strike price – Total Premium Received), secondly if the spot price starts increasing (BEP= Call Strike price + Total Premium Received).

Short Strangle Option Strategy Example

Let’s take an example of Bank Nifty which is currently trading @ 47000 (spot price). For creating short strangle traders need to sell out of the money (OTM) contracts for both direction. In simple words he need to sell 1 lot of 48000(strike price) call around Rs 200 along with 46000 (strike price) put around Rs 200. Total premium received Rs 400.

In this option strategy, the breakeven point will achieved at 48200 (48000+200) and your trade position will be in loss beyond this level.

In the second situation, the breakeven point will be at 45800 (46000-200) and you will also start incurring the loss beyond this point.

#3 Ratio Bull Call Spread Option Strategy

Trader may use this strategy when he is expecting some bullishness in near term but he also expects that bullishness will not cross aver a certain point. To create Ratio Bull Call Spread Option Strategy, 1 at the money ( ATM) call buy with 2 lots sell of OTM call.

As you have to sell the two call options, it will reduce the upfront payment which will make the risk-reward ratio encouraging. The best part is your trade positions could be profitable even if the underlying security goes down or remains stable till the date of contract expiry.

In this ratio bull call spread option strategy there will be two points where your trade position becomes at the breakeven point. First at lower breakeven = at-the-money+net premium outflow and second upper breakeven = the money call strike price + difference between two strike prices – net premium paid.

In this option strategy, the maximum profit is limited to the underlying security's price closes at the out-of-the-money strike price levels. On the other hand, the loss under this strategy could be unlimited if the stock price continues to move beyond the higher breakeven level point.

Ratio Bull Call Spread Option Example: Assume Nifty 50 is trading at 22000, then you have to buy one call option of 22000 with a premium outgo of Rs 100. In the second position you need to sell 2 call options at the strike price of 22200 with the premium you received is Rs 400.

In this option strategy, the first breakeven point will be at a lower breakeven point 21700 (22000-300). While the upper side breakeven point will be 22100 (22200+(22200-22000)-300). Under this option strategy, the net effect of time decay is positive as you have sold the two out-of-the-money call options. You should trade with this strategy when implied volatility in the market is very high.

Also Read: Best intraday strategy in low volatility

#4 Ratio Bear Put Spread Option Strategy

As the bear and put are mentioned in the name of strategy, this option strategy is suitable when you think any stock is trading at its higher levels and correction is due in upcoming trading sessions that will bring down the stock price to certain levels.

In this option strategy, you have to buy an at-the-money put option and at the same time also sell the two out-of-the-money put options. In this option strategy, your breakeven points will be at two levels with the possibility of unlimited loss if the stock keeps moving to the lower breakeven point.

Also Read: Stop Loss in Stock Market: How to Set Stop Loss Strategy & Take Profit

The first breakeven point will be the upper breakeven point = at-the-money put – net premium outflow. While the lower breakeven point = out-of-the-money put strike price – difference between two strike prices + net premium outflow. Here the maximum profit will be when the stock closes at an out-of-the-money strike price.

Ratio Bear Put Spread Example

Suppose in the spot market Nifty 50 trading at 22000, and you bought one put option of the at-the-money of the strike price of 22000 with the premium outgo of Rs 200, and simultaneously, you also sold the two out-of-the-money put options of the strike price of 21800 and received the premium of Rs 100.

The first breakeven point will be 21900 (22000 – 100) and the second breakeven point will be 22100 (21800-200+100). If the stock price moves below the lower breakeven point, loss will be started and it can be unlimited if the stock keeps moving in the same direction.

Summing-up

Apart from these four option strategies, there are also other popular options strategies like the iron condor and long butterfly spread that you can use in the sideways market. However, these two options strategies are more complicated as you have to enter into multiple trade positions from three to two in combination with call and put that can give returns in the range bound market.

Also Read: Best Option Strategy for Bearish Market: 7 Option Strategies

Trading in the options market is not easy as well as affordable, as you need huge of money to create multiple positions in the options market. And there are certain things like calculating the premium and net outflow if you enter into a certain option strategy. Precisely calculating the breakeven points or profit and loss in the option strategy is possible when you have expertise in the derivatives.

Also Read: Golden Rules for Trading in Stock Market: Top 10 Basic Rules

In such conditions, you need to get help from market experts who can compute all the possibilities of output of the option strategy in different market conditions. To get help from an options strategist you can become a customer of a full-fledged broking company that also provides discount broking services with tips and recommendations to trade in the stock market.

Also Read: Discount Broker vs Full Service Broker: Difference & Which is Best

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You will get an advance software system and the best trading facility to trade or invest in equity, commodity and forex markets. So, what are waiting for, to know more about options strategies or trade in the derivatives market, apply here to open a trading and demat account online.

Also Read: Things to Consider Before Buying Stocks for Long Term: 10 points

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