Options strategies that are advantageous when the stock market is quiet
As investors, we always look for lucrative opportunities in the stock market. However, sometimes the market can be quiet and lack volatility, making it challenging to find lucrative options trades. In such situations, it is essential to have a solid understanding of various strategies that can help us capitalise on these periods of low market activity.
This article will discuss highly lucrative options strategies that can be implemented when the stock market is quiet in Singapore. Experienced traders have tried and tested these strategies, making them reliable options for generating returns during low volatility periods.
Covered call option
The covered call option is a favoured strategy traders use when the market is quiet. It involves selling call options on stocks already owned in the portfolio. This strategy allows traders to generate income from their existing holdings while protecting them from potential losses.
To execute this strategy, the trader must first own at least 100 shares of a particular stock. They then sell call options on these shares, giving the buyer the right to purchase the stock at a predetermined price (strike price) within a specific time frame. In return, the trader receives a premium for selling the option.
If the stock remains below the strike price until expiration, the option will expire worthless, and the trader gets to keep the premium as profit. On the other hand, if the stock price increases and surpasses the strike price, the trader may be forced to sell their shares at a lower price. However, they still get to keep the premium received from selling the option, reducing their overall loss.
The covered call strategy is an excellent way for traders to generate income during quiet market conditions because it takes advantage of time decay. As options approach expiration, their value decreases, allowing the seller to potentially make a return from the premium received.
Long straddle option
The long straddle option is a strategy traders can use when they expect a significant price movement but are unsure of the direction. This strategy entails purchasing a call option and a put option with identical strike prices and expiration dates.
When the stock price experiences significant fluctuations, traders can exercise the corresponding option and capitalise on price movement. However, if the stock remains relatively stable, both options will expire worthless, resulting in a loss of the premium paid.
This strategy is advantageous during quiet market conditions because it allows traders to take advantage of sudden price movements without accurately predicting the direction. It also has limited risk since the maximum loss is only the premium paid for both options. Saxo Bank Singapore provides a comprehensive guide on long straddle options and how they work.
Short straddle option
In contrast to the long straddle option, the short straddle strategy involves selling both a call and put option with an identical strike price and expiration date. It is a neutral strategy that takes advantageof time decay when the stock price remains relatively stable.
The short straddle option generates income for the trader through the premium received from selling both options. As long as the stock price stays within a specific range, both options will expire worthless, allowing the trader to keep the entire premium as profit.
However, the trader may face unlimited losses if the stock price moves significantly in either direction. It makes the short straddle option a high-risk strategy that experienced traders should only implement with proper risk management strategies.
During quiet market conditions, this strategy can be highly lucrative as options tend to lose value due to time decay. However, it is crucial to closely monitor and adjust this trade if the stock price starts to move significantly.
Iron condor option
The iron condor strategy combines two vertical spreads – a bull put spread and a bear call spread. It is a limited-risk strategy that takes advantageof time decay when the stock price remains within a specific range.
To execute this strategy, the trader sells a call option with a higher strike price while purchasing another one with an even higher strike price. Similarly, they sell a put option with a lower strike price and buy another one with an even lower strike price. This approach allows the trader to effectively navigate the market while maintaining the original intention of the strategy.
By implementing this strategy, the trader obtains a net credit corresponding to the disparity between the premiums earned from selling options and the expenses incurred from purchasing options.
As long as the stock price remains within the strike prices of both spreads, all four options will expire worthless, allowing the trader to keep the entire net credit as profit.
The iron condor strategy is highly lucrative during quiet market conditions because it takes advantage of time decay while limiting potential losses. However, traders must closely monitor and adjust this trade if the stock price moves significantly.
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