When you trade options, you can profit in any market condition. You can make money when the market goes up, down, or sideways. In this post, we will discuss a strategy that allows you to trade both sides of the market and generate consistent income.
We discuss:
- Why trade both sides of the market?
- How do we profit on both sides of the market with options?
- What is the risk and reward of trading both sides of the stock market with options?
- How do we manage trades on both sides?
- What is the psychology behind trading both sides of the market?
This is a great strategy for anyone looking to generate consistent income from their trading. If you are new to options trading, or if you are looking for new ideas, watch this video!
Real quick guys, please hit the like and subscribe buttons below as well as comment and let me know what you think about this video. Also, check out the “Complete Guide To Stock Options – Free Training for Beginners! (Everything You Need To Know)”. I’ll put a link down below. It covers everything you need to know about stock options and provides the tools needed to consistently beat the S&P.
If you are interested in learning about the coaching program, please shoot me an email at darren@darrensteves.com and we can book a 15-minute video call. We can talk about your goals and if you may be a good fit for the options coaching program.
So let’s get started!
Why trade both sides of the market?
The answer is simple: to make more money and reduce risks.
As a basis for trading stock options, we first need to understand options math and accept the fact that the stock market is extremely efficient. There are millions and millions of people trading every day and the markets move extremely fast.
Data or information that anybody receives on a stock or a company is immediately priced into the market. So there is no getting a leg up on news since everything is priced in immediately. There’s no edge that you can get in knowing information about a company in advance or having some insider knowledge.
We also need to understand that In most cases, most CEOs don’t have a clue where their stock is going to go. They don’t know how it’s going to react to the market, regardless of how well they think they might be doing.
To that end, we have to understand that we have no clue where a stock is going to go, and nobody else does either. We might have an assumption, an opinion, but at the end of the day, we’re all no better than 50/50 on our guesses.
When we trade both sides of the market, we take advantage of this fact. We reduce risks because we can only lose on one side and not on both. So one side will always be a winner and one a loser. We make money anytime the stock stays within a range and doesn’t move outside of it. We sell strangles and iron condors to make this happen.
Instead of profiting on just one side, we make money on both sides. So we are double dipping!
How do we profit on both sides of the market with options?
Let’s show a real example of how we profit on both sides by selling a strangle in Chewy. When we sell strangles, we want to do it in high IVR. This way we can collect a good premium.
In looking at Chewy, the IVR is high at 42. Anything above 30 is great. The stock is liquid with over 3M shares traded daily. Anything above 1M is usually okay. The stock has also been forming a base and trading within a range over the past 6 months. This is great for strangles!
Now pick the strikes to sell that are just inside the 1 standard deviation expected move which gives us a 67% probability of profit. We collect $197 immediately upon placing the trade and we are only using $352 in buying power.
As long as the stock price stays above about 28 and below about 44.50, then we are profitable.
What is the risk and reward of this trading both sides of the stock market with options?
The risk with selling strangles to trade both sides of the market is that the stock price may move outside of our expected range and we will lose money.
The reward is that as long as the stock price stays within our expected range, we collect a premium and make money on both sides!
In this trade, the max risk is unlimited to the upside as technically there is no cap on how high the stock can go. But the odds of it rocketing up skyward are not great. Especially since we are currently in a high inflation economy with interest rates rising. The max risk to the downside is if the stock goes to zero and Chewy goes bankrupt. However, their fundamentals are great and the business is doing well.
The max reward is the $197 when we placed the trade. So I believe the risk to reward is a good one!
How do we manage trades on both sides?
When we trade both sides of the market utilizing a strangle, trades are managed at about 50% profit and 21 DTE Days to Expiration.
This means that once we reach 50% max profit, we close out the trade. So in this case, once the time value has decayed and there is only about $100 (half the $197 collected), we are happy and close the trade for the win.
If the stock price moves and breaches one of our short strikes, we roll the winning or untested side closer to the stock price to collect more premium. This improves our break-even price, and further reduces our cost basis.
At around 21 DTE (Days To Expiration) I look to roll the strangle to the next month or cycle and collect more premium. We choose 21 DTE because this is when the time decay starts to ramp up. This smooths out our risks by extending the trade. We roll at around 21 days and collect more premium in the next month.
Adjustments can be made at this time to recenter the strangle. Or if you think the stock will come back within the range the strangle can be maintained at the same strikes when the trade was put on.
What is the psychology behind trading both sides of the market?
The psychology behind trading both sides of the market with options is that we know that we are always going to be a winner on at least one side. If for some reason, the stock price moves outside of our profit range, it’s okay! We can always adjust the trade and reduce our risk while collecting more premium.
If the stock price doesn’t recover before 21 DTE, we extend the trade and collect more premium. We rinse and repeat every month as necessary.
The important thing is to remember that we are always going to be a winner on one side of the trade, so we can be confident in our decisions and not get discouraged if things don’t go our way at first. In the long run, we can turn almost any trade into a winner in time. It’s just a matter of if it happens immediately or takes a few months.
Conclusion
In conclusion, trading both sides of the market with options is a great way to get paid while waiting for the stock price to move. We collect a premium and have the potential to make money on both sides of the trade. Risks is also reduced using trade management when needed. We just need to be patient and let the trade work itself out.
So we can make money in any market. Whether it is moving up, down or sideways!
Do you have any questions about trading both sides of the market with options? Let me know in the comments below.
Also, if you are interested in learning about the coaching program, please shoot me an email at darren@darrensteves.com and we can book a 15-minute video call. We can talk about your goals and if you may be a good fit for the options coaching program. I’ve also put a link down below to a video that tells you more about the program.
Alright, guys, make it a great day, and happy trading!