Trading a Boring Market with Options

ETFs, Options

There are lots of jokes floating around the internet regarding other things you could be doing with your time instead of trading. These take the form of funny memes or gifs, or just random humorous one-liners. The jokes are popping up because of how incredibly boring the stock market has been this year.

The lack of volatility in stocks is possibly record setting, depending on how you measure stock market conditions prior to the introduction of the term ‘volatility’ into the lexicon of the investment community. But essentially, no matter how you measure it, volatility is at or near historical lows.

In other words, if you’re a trader or investor, things have been incredibly boring lately.
If you’re a stock trader, boring market conditions are generally not good for anything except collecting dividends. Stock traders make money on market movement, typically up, but sometimes down.

On the other hand, you can make plenty of money in a boring, sideways market trading options. In fact, if you’re an options seller, flat markets can often be the best kind of markets for making money. You simply utilize an options strategy involving collecting premium (from selling options) and sit back and watch the income stream in.
Well, it’s not quite that simple as you still have to manage your risk – but you get the picture.

Here’s the thing…

At least one big money options trader expects the market to make very little noise through the rest of August. This trader made a large bet that the S&P 500 is going to be trading in a tight range for the next three weeks or so.

More specifically, a trade was placed in options on the SPDR S&P 500 ETF (NYSE: SPY), one of, if not the most heavily traded ETFs in the world. The particular strategy used is called a strangle, where a call and put are bought or sold in the same expiration month, but at different strikes.

When buying a strangle, the buyer is looking for movement higher than the call strike or lower than the put strike. But when selling, the seller wants the underlying stock or ETF price to finish in between the strikes.

For this trade, the strangle consists of the 250 call and the 244 put, both expiring September 1st with the SPY trading at $247 at the time of the trade. Both options were sold for a total credit of $1.79, and the strategy was executed 1,280 times. As such, max gain occurs between the 244 and 250 strikes on September 1st, and breakeven points are at $242.21 and $245.79.

Given the premium collected, the seller is looking at SPY staying in roughly a $10 range through August. Another way to look at it is the strangle seller doesn’t expected the SPY to move greater than 2% in either direction for over three weeks. That’s definitely a tight range.

What’s interesting is the trade has basically unlimited risk in either direction if something major happens, so it’s certainly a more risky trade than I’d ever recommend. But, the seller does have probability on his or her side given how low volatility has been recently. By the way, the trader will collect about $230,000 if the SPY continues to move sideways… not a bad month’s work.

As I said, I would never recommend a trade like this as it’s too risky. If fact, this strangle seller probably has the position hedged in some other way we’re not aware of. Generally strangles like this are not just sold outright.

For anyone interested in making a bet on a boring August without all the extra risk, you could use a safer strategy like a short iron condor or credit spreads (short vertical spreads). An even easier way to do it with limited risk is simply buying puts on a long volatility ETF. Finally, you could buy an inverse volatility ETF straight up which makes money as volatility goes down.

Of course, there isn’t a lot of upside to the last two methods I mentioned as volatility is already so low. But, there’s always a first time for everything. Maybe August will be the most boring month in the history of the stock market.

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