Trading Options in Challenging Markets

By Joe Duarte

You can participate in rising or falling markets through stocks and ETFs, assuming that you are comfortable with both owning these securities and selling them short. But what do you do in a sideways market, except maybe sitting it out or collecting a few dividends? You can craft option strategies for sideways markets whether you have any underlying positions or not.

Reducing your directional bias and making money in flat markets

Directional bias refers to the connection of profits to the direction of prices. To make money when you are long, you need prices to rise. And to make money when you’re short, you need falling prices. When you use option combination strategies, you design trades that let you make money when the underlying stock moves up or down. Consider this:

  • You can set up strategies that let you profit if the underlying rises or falls, depending on your trade setup.

  • Options let you set up strategies that can make money in sideways markets.

Controlling your emotions

Perhaps the most difficult part of trading any market is the emotional responses that can be triggered by price movements in things you own, or wish you owned. Being emotional is part of being human. The problem is that emotional trading is usually the path to big losses. That’s why there are rules and why you design an anticipatory trading plan, in order to control the emotion that goes along with trading.

A good trading plan has these key characteristics:

  • Access to the proper equipment: Make sure you have all the technology you need: computers, mobile devices, and backup systems along with a quiet place to work.

  • Knowledge of time commitment: Think about whether you will day trade or be a longer time position trader. If you can’t devote a couple or three hours at a time to monitor a position, day trading is not for you.

  • Access to good information: Put together a good list of websites and a reliable real‐time quote‐charting service.

  • Flawless trade execution: Pick an online broker that has some scale and can execute your trades in a timely fashion without leaving you in the cold.

  • An excellent educational component: Work on your analytical skills, technical and fundamental, every day. You need to be a crack chartist and hone your decision‐making skills.