How to Profit in a Sideways Moving Market

At The Motley Fool, we don't believe market timing is wise. We believe people are better served saving and investing for the long term without trying to jump in and out of the market.

Keeping that distinction in mind, there are tools that may allow you to even out market volatility and generate returns when the market's flat or down.

In this video, Motley Fool Pro advisor Jeff Fischer explains one of these tools to Motley Fool co-founder Tom Gardner. It's an options strategy called "writing a covered strangle."

If you enjoyed this lesson, then you might be interested in our Motley Fool Pro investing service. Pro aims to deliver consistent, recurring profits with a high level of accuracy in all markets. To learn more, just click here.

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Read/Post Comments (12) | Recommend This Article (35)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 13, 2013, at 6:17 PM, MoreIsNotEnough wrote:

    Did I correctly hear the guy at the board say, regarding the put option, that if the stock falls below the strike price "You get to buy shares IF YOU WANT"?

    I think you need to re-shoot this. The guy at the table had it right, your are FORCED to buy the shares.

  • Report this Comment On February 13, 2013, at 7:44 PM, enthuskeptic wrote:

    An option, put or call, is on 100 shares, right? That means that one needs a lot of money in the bank in case it will be necessary to buy the 100 shares. Are there cheaper stocks. for example at USD 5 OR 10, that are "optionable"? How can we find these if they exist?

  • Report this Comment On February 13, 2013, at 7:57 PM, DOCyclist wrote:

    Can you pls provide transcript or caption option? Thanks.

  • Report this Comment On February 13, 2013, at 8:43 PM, wertheimam wrote:

    When The Fool recommended National Oilwell Varco

    the first time as the only oil company you'll ever need it dropped approximately 19%. Its just been recommended again. To cost average?

  • Report this Comment On February 13, 2013, at 9:44 PM, dgmennie wrote:

    Please don't tell me that buying or selling options is the way to any type of stock market success. You are promoting a casino game that only a few pros understand well enough to play successfully. This DOES NOT include the average small investor who requires steady, worry-free income from his/her portfolio every month, not a crapshoot.

  • Report this Comment On February 13, 2013, at 11:27 PM, MoreIsNotEnough wrote:

    enthuskeptic - Yes, option contracts are typically, 100 shares per contract, and yes, it takes money to make money ;-) When you sell a put, you'd better have the money to cover it in case you have to buy the stock. If you sell a call, you should already own the stock (a covered call), because theoretically, the sky is the limit on the market price when the option expires, and you don't want to be forced to buy it then.

    dgmennie - You have to be sensible about it. I only sell options on stocks that I want to own because they pay high dividends. If the stock is low, I sell a put to possibly get it even cheaper. If it's high, I sell a call above what I paid to guarantee a profit. If it's not high enough to sell a call, I sit on it until it goes up and collect the divy. Haven't tried a "strangle" yet.

  • Report this Comment On February 14, 2013, at 3:12 AM, OptOrNot wrote:

    This is all very intriguing and makes a lot of sense, yet I'm not getting a warm and fuzzy feeling based on the reviews that I've pulled up on-line. I've got a fairly diversified and productive portfolio that I've put together for the most part from suggestions through Stock Advisor. Will I be able to leverage what I have established or what I should say is what Stock Advisor has helped me establish without exposing myself to an inordinate amount of risk?

  • Report this Comment On February 14, 2013, at 10:11 AM, TMFCrow wrote:

    ""You get to buy shares IF YOU WANT"?"

    @MorelsNotEnough

    You seem to know your options so you also know that just because the stock price drops doesn't mean that the owner of the put options will exercise their right to sell shares immediately (because the puts still have time value; therefore, selling shares on the open market and selling the owned put is more profitable). This provides Jeff --from the video above-- enough time to close the position or roll it to avoid assignment, which is what he meant when he said if you want.

    To be clear you are absolutely correct if the option is in the money on expiration date. Thanks for contributing to the conversation.

  • Report this Comment On February 14, 2013, at 10:55 AM, JohnDvorak wrote:

    The example you used makes no sense -- it is impossible to make $ 5. on your straddle. May 55 Put is at 1.80 --the 65 call is at .85.

    So what gives??

  • Report this Comment On February 14, 2013, at 12:12 PM, MoreIsNotEnough wrote:

    @TMFCrow

    "This provides Jeff --from the video above-- enough time to close the position or roll it to avoid assignment, which is what he meant when he said if you want."

    You had me very confused for a second, because my name is also Jeff :-)

    You are of course correct about closing the position, but I listened to what he said again (and again) and finally transcribed it...

    "When you sell a put option, you get to buy the shares if the shares fall below your strike. So if the $58 stock falls below 55 at the expiration in May, you get to buy shares if you want."

    He doesn't mention closing the position before the expiration date. So once again, I say that this is wrong. If the share price is at or below the strike price (in the money), at the expiration, you don't "get to buy", you have to buy. The shares will be purchased automatically. No "if you want" about it.

    I'm pretty new at trading options (less than a year). I only do it with a small portion of my portfolio, in a separate account from my Buy and Hold positions.

  • Report this Comment On February 14, 2013, at 9:58 PM, Ragingmoose wrote:

    I prefer read writers. Please transcript !

  • Report this Comment On February 19, 2013, at 12:04 AM, MeridianShort wrote:

    While I am a fan of "selling" options vs. buying options, this is a very misleading video. A couple of points...

    1) They don't point out that their upside is capped at ~10%, while their downside is essentially unlimited. Every $ the stock rises above $60, they are gaining $1 on their long position, but losing $1 on their $60 call. So profit is always capped at $5 in option premiums + $2 cap appreciation (58 to 60).

    2) This strategy assumes you have cash to buy more shares if the stock falls below $55. The problem with this is, if you are managing your portfolio in such away that you are ALWAYS able to "double" up your position, then you are always 50% cash. So that 10% you are earning in 4 months in this strategy, is really only on half your portfolio. Your real return on a strategy like this (with 50% cash) is 5% in 4 months. As the founder of an investment club I can tell you, it is very difficult to out perform a sideways, or up, market with a high cash position.

    The most important piece of this video is the part about 90% of options expiring worthless. If you are like most investors who don't have a 50% cash position, you are better off writing only the COVERED calls. Then if your shares are taken, find another stock you WANT to buy and instead of buying, hold cash and sell puts until it hits your price. You can collect the same 3% month on your cash position without holding any shares.

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