Monday, July 29, 2024

What To Do In A Sideways Market

We find ourselves in no man's land in a flat market…
 
   
     
A Flat Market

On Friday, I wrote to you about where we find ourselves in the markets… In what I consider  “no man's land”.

On Friday, the S&P, Dow, Nasdaq, and Russell 2000 all rose after nearly two weeks of high volatility and falling in the indices. Today they’re relatively flat.

Last week, I also shared that I had no idea or expectation of what today could bring. The market action just hasn’t been making much sense for the last couple of weeks.

I typically have some bias one way or the other, but between these areas in “No Man’s Land” I really try not to guess.

Friday performed extremely well, but I had already told you there was a good chance of that happening. The real question for me is the follow through from that. So far, nothing.

In my mind, we have the conditions for a bigger swing lower of the last few weeks of momentum and, of course, we have the potential that the market does what it’s done the last 8 months where we bid up from the lows and make a new high.

But, in the meantime, the market appears to be catching its breath and waiting for the outcomes of more Fed info and huge earnings at play the next few weeks.

I don’t think this scenario is a great spot for options traders making directional plays (if you’re trading underlying stocks, no harm no foul).

But it is a fantastic opportunity for income plays.

Take a stock like GLD for example: 
 
 
It’s been trading in the range of $212 to $228 since April, and it’s clung to a pretty tight average around the $215 to $220 range.

With GLD, we have a stock that
 
1. Has been relatively ‘net flat’ even with some swings
2. A clear range it’s been trading in 
3. No foreseeable catalyst to push it higher or lower
4. Some key levels we can use to build the trade

Those are the conditions for some pretty good income trades.

For example, if you were willing to own GLD at $215 (a little discount from the current price) you could get about $.45 selling the Aug 7 $215 Puts. Meaning if GLD was higher than $215 on Aug 7, you’d generate a pretty healthy return.

If GLD finished lower than $215, you’d have to buy shares of GLD at the $215 price (minus your credit) which I don’t think is too bad of a price to own it.

If you wanted to eliminate the risk of having to buy the stock, you simply would sell the $215 Put and buy the $214 Put… You can make about 12% on that trade in under two weeks if GLD finishes above $214 — not bad for a non-directional market.

And if you really wanted to get fancy, you could “trap” the price of gold with an iron condor where you sold the $215/$214 Puts and also sold the $225/$224 calls.

Now, you’re playing a very sideways trade where if GLD stays flat (between $215 and $224) you’re making a monster 50% return in under two weeks.

The point being, these are the conditions where you can flip things around to target big returns without needing the market to move rather than getting grinded to dust while you wait for the move!

And remember, there’s a reason the Chicago Mercantile Exchange reported 76% of options expire worthless — most people never get that big, directional move they’re betting on.

That’s why in Automated Options, we only look for around a 1% move at any point over a two week period to flip those odds around.

Check out Automated Options Here.

— Nate Tucci
   
 
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