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How Many Directions Can A Stock Trend?
New traders are often asked a trick question: How many directions can stocks trend? While the new trader might say “two” (up and down), the answer, of course, is three: up, down and sideways. In fact, stocks often trend sideways as much or more than they trend up or down.
Is it possible to make money in these range-bound environments? As a matter of fact, yes, and option trading in particular provides several such strategies. These range-bound strategies involve premium selling, allowing the option trader to take advantage of time decay, an enemy of the pure option buyer.
Schaeffer’s newest alert service -- Schaeffer's Iron Trader -- offers iron condor and iron butterfly recommendations, trades that profit from a sideways trend and decreasing volatility.
Although the names sound exotic, you’ll essentially be betting that a stock will continue in its trading channel. In an iron condor strategy, your lower and higher breakevens will be further apart, giving you a wider profit zone, but a lower potential return on risk-adjusted margin. In the iron butterfly strategy, the profit zone is narrower but the profit potential is greater.
These recommendations will be based on our analysis of historical charts and current open interest configurations on individual equities, incorporating our Expectational Analysis® approach. We'll be looking for stocks, index, or exchange-traded funds (ETFs) that are trapped within a tight trading range, with specific areas of both support and resistance.
Iron condor: One way to describe an iron condor is a bearish call credit spread stacked on top of a bullish put credit spread. The goal is for these options to expire worthless, allowing the trader to retain the entire credit received at the initiation of the position.
A credit spread is the sale of an out-of-the-money call (or put) and the purchase of a deeper out-of-the-money, and less expensive, call (or put). The option player wants the sold option to remain out of the money.
In an iron condor, the stock is surrounded by two different sold strikes. As a result, the goal is for those options to expire within those two strikes and out of the money.
For example, XYZ shares are in a sideways range that has kept the stock trapped for several months. The stock has been hindered by resistance in the 20-21 region, while finding support in the 17-18 region.
With the shares trading at $18.81 and taking into consideration the stock's trading range, a trader sells an out-of-the-money 20 call at $0.23 and buys a 23-strike call at $0.02. The result is a net credit of $0.21 per pair of contracts. At the same time, the bullish end of this condor needs to be opened, so a trader sells the 17.50-strike put at $0.27 and buys the 15-strike put at $0.05, for a net credit of $0.22. The total credit on the entire position is $0.43, or $43 ($0.21 + $0.22 x 100).
If the stock remains between 20 and 17.50 (the two sold strikes) through expiration, the trader will be able to keep the entire premium.
Iron butterfly: In an iron butterfly strategy a trader is looking for the stock to close at a specific strike. This is also two credit spreads stacked on top of each other, but the sold strikes are the same. Much like an iron condor, the goal of the iron butterfly is for these options to expire worthless, allowing the trader to retain the entire credit received at the initiation of the position.
In an iron butterfly, say that ABC stock is trading at $20. The trader will sell a 20-strike call and buy a 25-strike call. At the same time, he will sell a 20-strike put and buy a 15-strike put. When the position is opened, the trader will receive a net credit. To retain the entire credit, the shares of ABC need to close at $20 at expiration for all the options to expire worthless.
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How to Generate an Extra $6,560 per Month
In June while the market wandered around like a
lost sheep, a savvy group of traders used these strategies
to rack up an astonishing +656% TOTAL GAINS.
And it only took thirteen trades to do it. That’s an
average risk-adjusted return of +50.46% per trade.
But that’s not all. 11 of these 13 trades were winners.
That’s an unheard of 85% win rate with options!
And it took an incredibly small amount of time to generate
this surprisingly large amount of income.
The first trade opened on April 27th and the last trade
expired on June 19th. That’s a little over 50 days in the
market.
If you had invested just $1,000 in each of these June
expiration trades, you could have generated a mouth-watering
$6,560 in extra income in those 50 days.
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Start Your Subscription to Schaeffer's Iron Trader Today
Iron Trader is regularly priced at $1,495 for one year. But with this special offer you save $500 plus we'll remove the expiration date from your subscription. Your $995 gets you into Iron Trader for life.
And we're so sure you will love this service that if at any
time in the first 90 days, you aren’t thrilled
with the profits we’re delivering...if you aren’t trading iron
condors and butterflies with ease...if you aren’t
generating passive income month after month...simply cancel
your subscription and we’ll promptly refund every cent you
paid. No questions. No hassles.
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