Another way to Make money in a Sideways Market

I have been talking a lot about iron condors lately because they are very helpful in making money in a sideways market, and that is what we are in.  But there are other ways that we can pull a monthly income from a sideways market.

One very effective method is selling a horizontal spread.  For example say you find a stock trading between $60 and $65 and you believe that stock will continue to trade between those levels for a couple months.

You can buy a call option on the stock a couple months out with a strike price of $65.  Once you have done that you can sell front month options with the same strike price and profit as the stock does not make any big moves.

So say you buy a call with a $65 strike price 3 months out for $8.  Now you sell the front month call on the same stock for $4.  Initially you would be negative but if the stock does not make a big move in the next 3 months you will be able to sell another option 2 more times.

If the stock stays between $60 and $65 for the next 2 months and you sell 3 calls against your call you could make $12.  Of course this is only an estimate because we don’t know how much we would be able to sell the other options for.

The big advantage this strategy has over the iron condor is the risk to reward ratio.  Suddenly you are not risking $4 to make $1.  Instead you are risking $1 to make $1 or even more.

The major disadvantage this has when compared to an iron condor is the time.  With iron condors you can sell front month and if those options expire worthless you could be profitable.  With a horizontal spread you need the stock to stay range bound for longer periods of time.  So the probability of you being correct probably will not be as high.

But it is a good idea to play around with different strategies until you find one that is working for you.

To learn more about the horizontal spread visit http://www.stocks-simplified.com/Horizontal_Spread.html