How to make money in a static market
In a relatively trendless market, like what we have experienced during the last 2 months, the use of options can be very lucrative. In a moribund market environment where prices are not going anywhere it can be difficult, if not impossible, to make money spreadbetting in the conventional sense; particularly if your area of interest is the indices. The lifeblood of most spreadbetters and, indeed, the majority of market participants is volatility — without moving prices then how do you make money? This month we will look at how selling option premium by way of so called ‘straddles and strangles’ is one way you can still generate potential profits in a market environment like that which we are experiencing at present.
Now, you may take the view that this range is likely to remain in place for the balance of the year. If this is your view, then one possible way to take a position is to sell what is called a strangle. A strangle is the sale of both a Call and a Put option that are each ‘out-of-the-money’.
Below is a chart of FTSE over the last 6 months. We can see clearly that the index has essentially ranged between 5200 and 6000. It seems sellers assert themselves at the 6000 level and buyers come back to the table towards 5000.
For example you could construct a strangle as below Sell the November 6000 Call for say 40 and Sell the November 5000 Put for say 55
July 2012 | www.financial-spread-betting.com | 89