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How to Make Money from Sideways Stock Moves by Selling Option Premium

December 2nd, 2014

Typically you make money through selling options. It's through options that you can make money from a stock moving sideways...

If you're just buying and selling shares of stock, you typically can't make money if your stock is moving sideways. You need upward or downward movement to capitalize on the long or short position from your stock trade.

With options, you get more flexibility because you can capitalize if the market is moving sideways. You can even make money if the stock is going up or down.

You sell option premium to achieve this. There's a few different strategies you can use, and some can get complicated...

Option Premium

Option premium is like selling insurance. Insurance has to continually be paid over time – as life progresses, you have to constantly pay for insurance.

If you buy your insurance premium at an older age, it will be more expensive compared to purchasing in your youth. If you're selling option premium, you're selling premium on a stock. This is a great way to capitalize sideways movement!

I want to share a few strategies...

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The above example shows a Calendar Spread. You sell option premium in the front month and purchase protection in the following months. The one in the front month is going to deteriorate quicker than the one in the back month.

For example, an 80-year-old person will approach death much sooner than a teenager. So you are selling your front month and purchasing protection for your later months. Expiration is much slower.

If the market doesn't do anything between these points, you slowly make money as the line rises.

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The next example is an Iron Condor. The Iron Condor is basically two spreads on both sides of the stock.

You're selling one vertical on one side and another vertical on the other side – creating a spread. In this example, you're saying, "I'll give you coverage if you're 80 years old and if you're 20 years old. But if you're between 40 and 60 years old, you won't be covered."

You can think of this as only selling to the extreme insurance premiums. If a stock is at 500, you may sell some option premium at 600 and at 400. The range between 450 and 550 will be profitable over time as things deteriorate.

Of course these strategies are more complicated than the detail I'm going into here. However, it gives you food for thought to research and put into practice later...

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The final thing I want to share is a Butterfly Spread. It's similar to an Iron Condor – everything is in the same month and you're selling right around the money the stock is being traded.

You're selling option premium and buying a leg of protection on both sides. It requires a minimum of four option contracts to create this spread.

This contract has a little quicker option deterioration than a Butterfly. You can see the profit picture is similar, but it deteriorates quicker. You can notice this by the theta that's available.

In either case, these are strategies you can use if the market is moving sideways when trading options. I don't recommend you jump into options right away, but it gives insight if the market trades sideways.

You can constantly collect this premium or option theta as the market is standing still or slightly moving. Of course you need to brush up on these strategies in more detail before moving forward, but hopefully this got you thinking about the possibilities!

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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