How to Rake in Profits When The Markets Don't Do Anything

By: Paul Nickel
Submitted: 2007-01-17 16:17:37
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Opportunity can be disguised in many ways, and the creative among us must continually be wary of the nuances that may eventually make a profit. Many traders will dutifully follow the standard buy on breakout, sell on breakdown pattern to get their profit. But what happens when the markets don’t go anywhere? Most will just wait it out, until some volatility returns.

But what if there’s profit to be made when the markets don’t move? Well, there is a way to make a profit when you’re relatively sure your market is range bound for the indefinite future. Here’s how.

If you know the upper and lower range of your market, the way to profit is to buy an option spread on the upper and lower range limits of your market. What is a spread?

It’s when you sell an option at a higher dollar amount (closer to the current price of the underlying commodity) and simultaneously buy an option at a strike further away (and thus cheaper) than the underlying commodity. The net difference is a profit that you can pocket. If the market doesn’t move, then you keep the profit when the options expire. If the market does turn on you, then you’re only at risk for the difference in the strike prices between the option you sold and the one you bought. If you buy a spread on each side of your range bound market, you can pocket healthy returns. Suppose it takes off to the high side and takes out your spread there, well you still have the profit from the spread on the low side to cushion your losses.

The best markets to do this in are the indexes (For example, an airline or transportation index). You can get a list of these from any decent online brokerage site. Why indexes?. Think about it. Indexes are a basket of stocks that are grouped together. They provide stability yet allow you to trade a sector when you have an idea where that particular sector will go (Or not go in this case). Most importantly, their options are very liquid, which allows you to trade them effectively (One of the biggest shortcomings of options are that if they are thinly traded, your profits go way down, both because you will have difficulty buying or selling them in that situation, and the spread will be too great. By nature, index markets are less likely to spike in either direction than a single stock or commodity, and thus make them an ideal prospect for this type of trade. Try it out the next time you see the markets in the doldrums.

Paul Nickel is an active trader and his financial writings can be viewed at http://www.lowrisktrading.info.

Article source: Expert Articles

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