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How do I bet that a stock price will not move?

Personal Finance & Money Asked on November 30, 2020

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?

2 Answers

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.

Answered by Canute S on November 30, 2020

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).

  • Buy 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.

Answered by Bob Baerker on November 30, 2020

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