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If I believe a stock will go up, I buy the stock. If I believe a stock will go down, I short the stock. If I believe a stock will neither go up nor down, what do I do? How do I profit from a non-movement in stock price?

I think I might be able to profit by selling a naked put and a naked call option with a strike price equal to the current stock price. Is this a valid method? Are there other methods?

user102086
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    I believe many users would find it interesting to see an answer that picked a single strategy and explained how it worked in simple terms but in some detail so that beginners can understand it without reference to Investopedia. The point wouldn't be to help someone make unwise trades but to help understanding, including for the merely curious. – Mark Foskey Aug 30 '20 at 05:16

2 Answers2

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There are several option positions based on non movement of the stock:

  • Sell a straddle (short the same strike put and call). Since both options are naked, you have open ended risk beyond the strike plus the credit received and the strike minus the credit received.

  • Sell a strangle (short an OTM put and short an OTM call). Since both options are naked, you have open ended risk beyond the call strike plus the credit received and the put strike minus the credit received with the difference being that you have more room for error than the straddle.

  • Buy a butterfly (short two of the ATM calls and buy an ITM call and an OTM call). The long strangle eliminates the open ended risk beyond the long strike. If you wish, use puts (there are 4 ways to create a butterfly).

  • Sell an iron condor (short an OTM strangle and buy a more OTM strangle). As above, the long strangle eliminates the open ended risk beyond the long strike.

  • Buy a calendar spread (short a near expiration and buy a further expiration, both at the same strike). If the stock cooperates (they rarely do), the near term option expires and the far term option has salvage value and which can be written against again.

Do yourself a favor and avoid options until you are very experienced with them, how to adjust positions, and disciplined risk management. Avoid naked straddles and naked strangles completely. Only write naked puts on stocks that you're willing to own.

Options are complex securities and they'll take your money from you if you don't understand them well.

Bob Baerker
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    While the descriptions of longs and shorts for the component options are correct for the butterfly and iron condor, those would be buying a butterfly and iron condor, not selling. Agree 100% on being wary of options. I've traded options institutionally for 25 years and even I don't touch them in my personal account. – kurtosis Aug 28 '20 at 04:12
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    When calculating the potential profit from a strategy involving multiple options, the brokerage costs to get into and out of the position must be considered. You also have to know what your broker will do on exercise day. I've run across very odd things here, like firms that will exercise ITM options and then immediately sell the new position, all at full-brokerage human-involved fees. These costs can be surprising. – Paul Aug 28 '20 at 09:37
  • @Paul - The OCC exercises all options that are one cent ITM at expiration (Exercise By Exception) with the exception being owners who designate via their broker that their long options not be exercised. The funky stuff occurs when the option holder does not have the margin to cover the exercised position. Some brokers then step in and STC. – Bob Baerker Aug 28 '20 at 10:30
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    How do I... How do I read your post? – Adam Barnes Aug 28 '20 at 21:09
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    @AdamBarnes this must be read in a context of a RPG game – ACV Aug 28 '20 at 21:15
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    @ACV But seriously though, every single paragraph has phrases I don't understand, and googling them just takes me to crazy wikis or sleazy feeling sites that explain in other terms I don't understand. Is there like a "Complete Dingus' Guide to Understanding MSE Posts"? – Adam Barnes Aug 28 '20 at 21:18
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    @AdamBarnes One can start with this: https://www.investopedia.com/trading/options-strategies/ – ACV Aug 28 '20 at 21:21
  • All those terms... Did you just make them up on the fly? ;) – Harper - Reinstate Monica Aug 29 '20 at 16:43
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    There I was, out-of-the money, living in the woods, ignoring the calendar and considering my options as I communed with nature. While doing a naked straddle, uncovered and spread out on a box, I looked across the Christmas tree spread. Out flew a butterfly from the diagonal. Before it could do a reversal, a condor flew out to collar and strangle it. Before going to sleep it off, I saw a twisted sister chasing a jade lizard that was trying to leap out of the way. What a long strange trip this has been :-) – Bob Baerker Aug 29 '20 at 17:23
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    Do yourself a favor and avoid options... until you are very experienced with options which is somewhat of a Catch-22, and when you are experience you'll realize how most of the time you'll make money selling options until tail risk wipes out all your gains and then some. –  Aug 29 '20 at 19:41
  • I reversed my phrases and it didn't express it adequately. AFAIC, selling options should be covered calls to sell at a target price, selling short puts to acquire a stock at a lower price (even a no upside risk Jade Lizard) and anything that is considered covered in terms of open ended risk (vertical, diagonal, calendar, iron condor, collared stock). – Bob Baerker Aug 29 '20 at 20:43
  • You describe a short iron condor but then say 'buy' it. That doesn't make sense, capping losses by using credit spreads is still a 'sell' activity as you've still got a net obligation. – Hart CO Jun 05 '21 at 15:35
  • Thanks for the catch. – Bob Baerker Jun 05 '21 at 15:41
  • @ACV "this must be read in a context of a RPG game" — What does this mean? Which role-playing game are you referring to? – Flux May 31 '22 at 11:53
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You have answered your own question - sell a straddle (simultaneous sale of call at put at a nearby strike) with day to expiry (DTE) at 1.5 times your betting horizon. The 1.5 times is to prevent gamma risk closer to expiry. You could also buy a higher strike call and a lower strike put simultaneously to make it a butterfly further reducing risk.

As usual harder your try to lower the risk lower will be the potential return.

Canute S
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    If the OP sells a strangle and then buys a higher strike call and a lower strike put simultaneously then it's an iron condor not a butterfly. And FWIW, all of the details about gamma risk, standard deviations, etc. are overkill for someone asking a basic question like this. – Bob Baerker Aug 27 '20 at 19:07
  • I meant a straddle, changed it now. Basic question or not options affect everyone the same so people need to be aware of what they are getting into. If I had to give a one line answer I would say "Don't get into derivatives without proper study". I have to add rest of the stuff in there. So if someone reads the answer and doesn't understand the other things they would go look it up rather then just sell a straddle and figure out the hard way what derivatives can do. – Canute S Aug 27 '20 at 19:17
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    @BobBaerker If OP feels that these answers are overwhelmingly complicated, they probably shouldn't be doing this in the first place. – Acccumulation Aug 27 '20 at 20:04
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    @Acccumulation - If a questioner asks if a selling a straddle is a valid method for betting that a stock price will not move then he definitely should not be doing this. My take is that there's a line between helping the questioner on their level of understanding versus showing off how much you know about the topic and overwhelming the questioner. Building blocks not sledgehammers... – Bob Baerker Aug 27 '20 at 20:35
  • The "financial WMD" comment is unnecessarily alarmist. All derivatives aren't created equal and people tend to get wiped out because of outsized positions and poor risk management, not because of the inherent nature of options. – 0xFEE1DEAD Aug 27 '20 at 20:54
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    Toned it down a bit if you guys feel it is a bit alarmist. BTW the initial answer was just the first paragraph. The OP asked a followup comment on position size which is not visible now so removing that part too. – Canute S Aug 28 '20 at 04:14
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    @BobBaerker and then, there's showing the questioner how little they know, which is what happens everytime I talk to a doctor about cancer treatments. 99% of fields I can get myself up to speed for an amateur understanding... not that stuff. – Harper - Reinstate Monica Aug 29 '20 at 16:51