Strategies for Trading Sideways Markets

Hey everyone, it's Kirk here again at Option Alpha. So let's talk trading in sideways markets. I'm going to go through my favorite strategy, but first there's two main strategies that you could probably use trading in sideways markets and that is first an iron condor and second is an iron butterfly. A lot of people probably debate which one to use. I have a personal favorite. I'll show you that here in this video and then kind of go through some examples. So the first strategy you can use in a sideways market is an iron condor. Now an iron condor. It's a cool strategy because it's basically a combination of two things. It's essentially a put credit spread. If you don't know about credit spreads and debit spreads, we'll have a link right below here to a video I did just the other week on credit spreads and debit spreads. And then it has a call credit spread. So it's basically like two spreads combined. It's a four-legged position. They call it a complex strategy, but it's actually not really that complex. Essentially what you're doing here is you're selling a put option at say $95, then you're buying a put option lower than that. let's say 90 in this example and that gives you protected and defined risk on the downside. In this case in our example here it's $300 and then on the call side you're selling a call option at 105 and then buying a call option for protection at 110 that gives you that spread. Again that gives you protected defined risk on the top side as well and essentially what you're doing here is you're creating a window of opportunity and this window of opportunity can be large, it can be small, it can... change for premium, right? But this is essentially a window of opportunity for you to make money if the stock essentially trades in a range. And that's why you're doing it in generally sideways markets. It actually works even in upward trending or downward trending markets. As long as the stock is trading inside of that range, that's when you make money. So the way that I think about it is I think about it visually like this. This is why I created this for you guys, is I think about it like this. You have a stock that's trading and the stock right now is somewhere in the middle, somewhere in here. And typically when you do an iron butterfly or an iron condor like this, you'll open it so it's fairly neutral. And what I mean by this is that the stock could actually run up and you could still make money. The stock could go down a little bit and you could still make money. It could trade sideways all through this range and kind of land somewhere in between here. And you still make your maximum profit at expiration. All of the positions, all of the legs expire out of the money and worthless at expiration. And so that's why You would want to use an iron condor like this is if you just wanted to trade range bound, which is why I like it. So using that example from before, our break-evens are about, let's say, I think it was like 103, something like that, and about 97 here, right here. So you can see the stock can trade anywhere in this range and we generally make money. It's only if the stock goes out of this range that we lose money on this trade. That's why I like it as a neutral to sideways strategy. Okay, the next example here that you can trade is something called an iron butterfly. People really love iron butterflies. It's actually very popular for zero DTE traders or short term, short duration traders. The difference here with an iron butterfly is mainly that you're selling the inside legs, the short strikes at the exact same strike price. So what this does is it creates like this peak or this very tall pyramid type shape to the payoff diagram where You sell a put option at 105, you could still potentially buy a put option at 90 for protection that does limit your downside risk. You could buy a call option at 110, but you're also still selling a call at 100. So you're selling a put option here, you're selling a call option at the exact same strike price. That creates this very, very tall peak here for this iron butterfly payoff diagram. And the difference, and obviously it's just that single strike that you're selling being the same. But in payoff, this typically is a little bit higher. So you would usually see, and the reason people trade iron butterflies is because this peak is really, really high. Now, my only concern with trading iron butterflies, and I have traded iron butterflies, is that that peak is very, very hard to nail. Basically, your max profit is one single point where essentially you've got to get the stock to land exactly at 100 at expiration. It's almost impossible to do. I don't know if people do it all the time or not, but essentially you got to get the stock to land exactly at 100. So the likelihood that you get your max profit here is probably much less. You're probably likely to get something that's in the range, right? Which means partial profits, partial losses, depending on where it is. So if you've got, again, visually look at an iron butterfly, it looks like this. You still have a nice profit range for an iron butterfly typically because you're still collecting a lot of premium. And that moves your break-even points out further. But it's really this at-the-money profit zone that's the highest and it's really hard to pin. So, if the stock is trading and the stock goes something like this, then you probably are in a partial profit, partial loss zone. If the stock lands here, yeah, it generally made a sideways move. But you're probably not collecting that max profit and that's maybe okay. Maybe the max profit's a couple hundred dollars and maybe you collect less than that, like maybe a hundred dollars, right? So that is a difference. It is, it's really typically that with iron butterflies, it's very hard to pin that price. And you also run the risk sometimes with iron butterflies of early assignment because one leg is always going to be in the money. So that's probably the two biggest drawbacks that I would say for me personally. are for iron butterflies is that they typically have that high profit zone which is never going to be hit right so you really can't count on that high profit and the risk of assignment is probably slightly higher for iron butterflies because one leg one short call or short put is always going to go in the money okay so let's look at some examples here and i'll come back to stats on the way that i run iron condor so you can see that some examples but if i just go into trade ideas here you can see it the market's open for the last 15 minutes or so we've already got About 1,000,003 trade ideas analyzed. What we can do is we can just use some quick presets here and then we can filter by neutral strategy. So I just used some quick presets that looked at ETFs, 20 to 45 days, the probability of max profit. Let's actually cut this one out here for a second just so we can get some iron butterflies in there. But we'll look at alpha more than 5% and expected value more than $5. I haven't done any other filtering here. It's just purely those positions. Then all I've done is I've said I want neutral strategies. This is where you could find potentially some neutral trading ideas. You just come into trade ideas, look for neutral trades that fit your criteria, fit whatever you want for your strategies, etc. The reason I took off the probability and max profit is because for iron butterflies, the probability of max profit is usually 1% or less. This depends on the strategy. It's usually 1% or less because it's very, very hard to pin that exact strike price for that position. That doesn't mean it can't be profitable overall and you can see sometimes these trades do have good positive expected values. It just means it's really hard to pin that max profit. These can sometimes be, I think, a little bit deceiving in that you have to really think through them because the max profit in this case, let's just open up this one right here. This is a GLD iron butterfly gold. Kind of been crazy lately, so it doesn't surprise me that GLD has some pretty wild pricing. But you look here, the probability of max profit, like I said, is less than 1% because essentially you're selling the $2.68 short put and the $2.68 short call, which means that in order for you to hit that max profit that you saw in our payoff diagram, you need the stock to land exactly at $2.68 by March 21st. So the likelihood that we get... An entire month of trading and gold to land exactly at 268, probably pretty low. That's why it's sometimes deceiving because a lot of traders will look at this max profit and go, oh, that strategy has a big, big, big max profit. You know, I can make $550. But again, you got to hit that, that literally that apex of that pyramid to hit that $550. So it's probably not likely to happen. You're probably more likely to land somewhere in the range where you get $200, $100, something like that where it's kind of somewhere on this range. If it lands in the middle, great, you have a bigger opportunity. Land somewhere around $268, great, you have a bigger opportunity. Let's contrast this with this one right below which is the same ticker symbol. I think it's a little bit different expiration but still about 20, 30 days out or so. But this is an iron condor. This one actually came up as a broken wing iron condor here just a little bit. That looks pretty good. But this one here has a nice wider. stance let me just move out that put option just so we get more of an iron condor look i'll just move out that put option manually here so you can see this so we'll just move out this one there we go there's more of an iron condor look here you can see for this position but you can see the stock is trading here at 268 it's got a little bit of call skew here right now because gld is moving up but essentially you're still range bound in this range so it's got to move from essentially 265 90 to 276 10 As long as it lands somewhere in that range, you're likely to make most of your money. In this case, the max profit being $211. You've got a higher chance of doing that. It's still not a super high probability trade because I haven't added any filters for probability and I'm manually moving things around. So let's look at some more examples. Let's actually go here to probability of profit. Let's get that probability of profit over 55%. You start to see a lot of things start to get filtered out. Again, GLD right now, probably top of the list of course because it looks like it's a pretty good ticker symbol right now with high implied volatility. So let's look at this one right here. So this is a nice looking trade. This one here is again in GLD. Nice and wide strikes. So you're looking at 260.46 to 270.75. Stock is trading at about 260.68 here so we're very balanced on this position. The probability of max profit here is 56%. and your max profit is about $55. So probably a pretty good trade here, good looking one. It's got positive expected value, positive alpha. The reward to risk is pretty good. Low premium trade, especially if you're a new trader, this is a very low risk trade. I mean, you could do this in an insanely small account. And of course you could use X options to manage this position. So let's go here and look at some other ones. So let's take this one off. Let's look at some more iron butterflies. I think we should have some iron butterflies in here. Let me just refresh. Get some new ideas here. Let's see if we find. So here's TLT. Here's another one to look at. This one's interesting. I don't know how I feel about stuff like this. But again, it's just a different layout for how you would do a strategy. So in this case, max profit is about 190. It's still pretty high profit. Probability getting there is about 1%, of course. Overall probability of profit, about 46, 47%. Probably not a strategy I would take necessarily. Not because it doesn't. It doesn't look like it could be a winner. It could be it has positive expected value, positive alpha. It's just not a slightly higher win rate that I would potentially want to build some consistency in my trading strategy. So let's look at another one here. Let's actually get GLD out of here, see if some other ones are in here. Okay, so here's an interesting one. This is an XLB iron condor. So this one here looks similar to GLD. You could diversify out just a little bit. Risk reward's not there yet, so it's probably getting close but not there. It does have... positive alpha, positive expected value. Probability of profit, 55%. Probability max profit, 47%. Looks like a 50-50 trade as far as risk to reward here. Nice wide wings, nice wide payoff diagram. So again, you could give XLB a lot of room to move here. That's why I like these iron condors because they just widen things out just a little bit. And I can forego the pyramid of potential profit here just to capture more premium. And- potentially get a higher overall probability of profit. Okay, so hopefully some of those examples worked. In my particular trading, and this is live trades, just iron condors, because you can tag them here, iron condors, and over the last year, the last year hasn't been good for iron condors, but that's okay. I've got 381 positions, win rate about 61%. Most of the trades and trades that I've been in is about 66%, so winning a little bit less than that. Still, the trade count isn't high enough. just yet. If I actually move this out to three years, you can see it's actually significantly different. And the reason I do that is because sometimes people will look at a short period of time, like a year or two years or six months with like 50 trades and then extrapolate that out. But that reason I looked at that first year first is because sometimes if you look at it on a very granular basis and or you're trading through that, it might not feel like you're making a lot of success with your strategy. But I like iron condors. I trade them a lot. I've got over a thousand positions now that I've traded. Win rate on those, and I do take profits a little bit early. That helps increase the win rate on most of those strategies, is 78%. Entry probability of profit still about 67% or so. Profit factor looks pretty good here. I do have, in this case, 222 losing trades and almost 800 winning trades for Iron Condors. This is, I think, the beauty of using bots and automations, by the way. It's like... If you had to physically trade through 222 losing trades, that takes a toll on you. I know it does for a lot of traders, but just like the actual ability to consistently trade a strategy like that, even if you go through this year, which this year was not a good year for this strategy. If you just look back a year with 300 trades, it was kind of break even at best down for iron condors, but over the long term did pretty well, right? And this is maybe what you might expect to see with strategies where you have these ups and downs for different. ticker symbols in different positions. IWM did pretty good for me over the last couple of years. Some of these other ones that didn't do so well, SPY was on a big run. GLD has had a decent run too. So it hasn't been the best one. I do have a Google trade in there, which I don't, I usually trade these on tickers. So let me see what that Google position is. Oh, this was an earnings trade that I did just a small $27 loser. That's okay. So that Google trade is in there, but you can see most of the tickers that I have for SPY are all ETFs. Trade a basket of different ones because I know that they're going to come in and out of favor. Some of those ones are going to be better some years. Some of those ones are going to be worse some years. It all really just depends on kind of how it goes. So hopefully this video helped out in just kind of understanding a little bit more about trading in sideways markets. Like I said, I like iron condors. I trade them more often than I trade iron butterflies. I don't trade iron butterflies that often. It doesn't mean it's a bad strategy. It's just my personal preference. I like those wider positions, a little bit better probability of success. A little bit better range of potential profit and I don't have to worry as much about assignment risk. Not that there's not assignment risk with iron condors. There could be if they start going in the money near expiration. But you don't have to worry about it right away like maybe you do for iron butterflies. As always, if you found this video helpful, please let us know. Add a comment right below. Give us a like and a share. Just help spread this video. Get it into the hands of more traders that are out there who need to see this. Until next time, happy trading.

A lot of people probably debate which one to use. I have a personal favorite. I'll show you that here in this video and then kind of go through some examples. So the first strategy you can use in a sideways market is an iron condor. Now an iron condor.

It's a cool strategy because it's basically a combination of two things. It's essentially a put credit spread. If you don't know about credit spreads and debit spreads, we'll have a link right below here to a video I did just the other week on credit spreads and debit spreads.

And then it has a call credit spread. So it's basically like two spreads combined. It's a four-legged position.

They call it a complex strategy, but it's actually not really that complex. Essentially what you're doing here is you're selling a put option at say $95, then you're buying a put option lower than that. let's say 90 in this example and that gives you protected and defined risk on the downside.

In this case in our example here it's $300 and then on the call side you're selling a call option at 105 and then buying a call option for protection at 110 that gives you that spread. Again that gives you protected defined risk on the top side as well and essentially what you're doing here is you're creating a window of opportunity and this window of opportunity can be large, it can be small, it can... change for premium, right? But this is essentially a window of opportunity for you to make money if the stock essentially trades in a range.

And that's why you're doing it in generally sideways markets. It actually works even in upward trending or downward trending markets. As long as the stock is trading inside of that range, that's when you make money.

So the way that I think about it is I think about it visually like this. This is why I created this for you guys, is I think about it like this. You have a stock that's trading and the stock right now is somewhere in the middle, somewhere in here.

And typically when you do an iron butterfly or an iron condor like this, you'll open it so it's fairly neutral. And what I mean by this is that the stock could actually run up and you could still make money. The stock could go down a little bit and you could still make money.

It could trade sideways all through this range and kind of land somewhere in between here. And you still make your maximum profit at expiration. All of the positions, all of the legs expire out of the money and worthless at expiration.

And so that's why You would want to use an iron condor like this is if you just wanted to trade range bound, which is why I like it. So using that example from before, our break-evens are about, let's say, I think it was like 103, something like that, and about 97 here, right here. So you can see the stock can trade anywhere in this range and we generally make money.

It's only if the stock goes out of this range that we lose money on this trade. That's why I like it as a neutral to sideways strategy. Okay, the next example here that you can trade is something called an iron butterfly.

People really love iron butterflies. It's actually very popular for zero DTE traders or short term, short duration traders. The difference here with an iron butterfly is mainly that you're selling the inside legs, the short strikes at the exact same strike price.

So what this does is it creates like this peak or this very tall pyramid type shape to the payoff diagram where You sell a put option at 105, you could still potentially buy a put option at 90 for protection that does limit your downside risk. You could buy a call option at 110, but you're also still selling a call at 100. So you're selling a put option here, you're selling a call option at the exact same strike price. That creates this very, very tall peak here for this iron butterfly payoff diagram.

And the difference, and obviously it's just that single strike that you're selling being the same. But in payoff, this typically is a little bit higher. So you would usually see, and the reason people trade iron butterflies is because this peak is really, really high. Now, my only concern with trading iron butterflies, and I have traded iron butterflies, is that that peak is very, very hard to nail.

Basically, your max profit is one single point where essentially you've got to get the stock to land exactly at 100 at expiration. It's almost impossible to do. I don't know if people do it all the time or not, but essentially you got to get the stock to land exactly at 100. So the likelihood that you get your max profit here is probably much less.

You're probably likely to get something that's in the range, right? Which means partial profits, partial losses, depending on where it is. So if you've got, again, visually look at an iron butterfly, it looks like this. You still have a nice profit range for an iron butterfly typically because you're still collecting a lot of premium.

And that moves your break-even points out further. But it's really this at-the-money profit zone that's the highest and it's really hard to pin. So, if the stock is trading and the stock goes something like this, then you probably are in a partial profit, partial loss zone. If the stock lands here, yeah, it generally made a sideways move.

But you're probably not collecting that max profit and that's maybe okay. Maybe the max profit's a couple hundred dollars and maybe you collect less than that, like maybe a hundred dollars, right? So that is a difference.

It is, it's really typically that with iron butterflies, it's very hard to pin that price. And you also run the risk sometimes with iron butterflies of early assignment because one leg is always going to be in the money. So that's probably the two biggest drawbacks that I would say for me personally. are for iron butterflies is that they typically have that high profit zone which is never going to be hit right so you really can't count on that high profit and the risk of assignment is probably slightly higher for iron butterflies because one leg one short call or short put is always going to go in the money okay so let's look at some examples here and i'll come back to stats on the way that i run iron condor so you can see that some examples but if i just go into trade ideas here you can see it the market's open for the last 15 minutes or so we've already got About 1,000,003 trade ideas analyzed. What we can do is we can just use some quick presets here and then we can filter by neutral strategy.

So I just used some quick presets that looked at ETFs, 20 to 45 days, the probability of max profit. Let's actually cut this one out here for a second just so we can get some iron butterflies in there. But we'll look at alpha more than 5% and expected value more than $5.

I haven't done any other filtering here. It's just purely those positions. Then all I've done is I've said I want neutral strategies.

This is where you could find potentially some neutral trading ideas. You just come into trade ideas, look for neutral trades that fit your criteria, fit whatever you want for your strategies, etc. The reason I took off the probability and max profit is because for iron butterflies, the probability of max profit is usually 1% or less.

This depends on the strategy. It's usually 1% or less because it's very, very hard to pin that exact strike price for that position. That doesn't mean it can't be profitable overall and you can see sometimes these trades do have good positive expected values.

It just means it's really hard to pin that max profit. These can sometimes be, I think, a little bit deceiving in that you have to really think through them because the max profit in this case, let's just open up this one right here. This is a GLD iron butterfly gold.

Kind of been crazy lately, so it doesn't surprise me that GLD has some pretty wild pricing. But you look here, the probability of max profit, like I said, is less than 1% because essentially you're selling the $2.68 short put and the $2.68 short call, which means that in order for you to hit that max profit that you saw in our payoff diagram, you need the stock to land exactly at $2.68 by March 21st. So the likelihood that we get... An entire month of trading and gold to land exactly at 268, probably pretty low.

That's why it's sometimes deceiving because a lot of traders will look at this max profit and go, oh, that strategy has a big, big, big max profit. You know, I can make $550. But again, you got to hit that, that literally that apex of that pyramid to hit that $550.

So it's probably not likely to happen. You're probably more likely to land somewhere in the range where you get $200, $100, something like that where it's kind of somewhere on this range. If it lands in the middle, great, you have a bigger opportunity.

Land somewhere around $268, great, you have a bigger opportunity. Let's contrast this with this one right below which is the same ticker symbol. I think it's a little bit different expiration but still about 20, 30 days out or so.

But this is an iron condor. This one actually came up as a broken wing iron condor here just a little bit. That looks pretty good. But this one here has a nice wider.

stance let me just move out that put option just so we get more of an iron condor look i'll just move out that put option manually here so you can see this so we'll just move out this one there we go there's more of an iron condor look here you can see for this position but you can see the stock is trading here at 268 it's got a little bit of call skew here right now because gld is moving up but essentially you're still range bound in this range so it's got to move from essentially 265 90 to 276 10 As long as it lands somewhere in that range, you're likely to make most of your money. In this case, the max profit being $211. You've got a higher chance of doing that. It's still not a super high probability trade because I haven't added any filters for probability and I'm manually moving things around. So let's look at some more examples.

Let's actually go here to probability of profit. Let's get that probability of profit over 55%. You start to see a lot of things start to get filtered out. Again, GLD right now, probably top of the list of course because it looks like it's a pretty good ticker symbol right now with high implied volatility. So let's look at this one right here.

So this is a nice looking trade. This one here is again in GLD. Nice and wide strikes.

So you're looking at 260.46 to 270.75. Stock is trading at about 260.68 here so we're very balanced on this position. The probability of max profit here is 56%.

and your max profit is about $55. So probably a pretty good trade here, good looking one. It's got positive expected value, positive alpha.

The reward to risk is pretty good. Low premium trade, especially if you're a new trader, this is a very low risk trade. I mean, you could do this in an insanely small account.

And of course you could use X options to manage this position. So let's go here and look at some other ones. So let's take this one off.

Let's look at some more iron butterflies. I think we should have some iron butterflies in here. Let me just refresh. Get some new ideas here.

Let's see if we find. So here's TLT. Here's another one to look at. This one's interesting. I don't know how I feel about stuff like this.

But again, it's just a different layout for how you would do a strategy. So in this case, max profit is about 190. It's still pretty high profit. Probability getting there is about 1%, of course.

Overall probability of profit, about 46, 47%. Probably not a strategy I would take necessarily. Not because it doesn't.

It doesn't look like it could be a winner. It could be it has positive expected value, positive alpha. It's just not a slightly higher win rate that I would potentially want to build some consistency in my trading strategy.

So let's look at another one here. Let's actually get GLD out of here, see if some other ones are in here. Okay, so here's an interesting one. This is an XLB iron condor.

So this one here looks similar to GLD. You could diversify out just a little bit. Risk reward's not there yet, so it's probably getting close but not there. It does have... positive alpha, positive expected value.

Probability of profit, 55%. Probability max profit, 47%. Looks like a 50-50 trade as far as risk to reward here. Nice wide wings, nice wide payoff diagram.

So again, you could give XLB a lot of room to move here. That's why I like these iron condors because they just widen things out just a little bit. And I can forego the pyramid of potential profit here just to capture more premium. And- potentially get a higher overall probability of profit. Okay, so hopefully some of those examples worked.

In my particular trading, and this is live trades, just iron condors, because you can tag them here, iron condors, and over the last year, the last year hasn't been good for iron condors, but that's okay. I've got 381 positions, win rate about 61%. Most of the trades and trades that I've been in is about 66%, so winning a little bit less than that. Still, the trade count isn't high enough.

just yet. If I actually move this out to three years, you can see it's actually significantly different. And the reason I do that is because sometimes people will look at a short period of time, like a year or two years or six months with like 50 trades and then extrapolate that out.

But that reason I looked at that first year first is because sometimes if you look at it on a very granular basis and or you're trading through that, it might not feel like you're making a lot of success with your strategy. But I like iron condors. I trade them a lot.

I've got over a thousand positions now that I've traded. Win rate on those, and I do take profits a little bit early. That helps increase the win rate on most of those strategies, is 78%.

Entry probability of profit still about 67% or so. Profit factor looks pretty good here. I do have, in this case, 222 losing trades and almost 800 winning trades for Iron Condors.

This is, I think, the beauty of using bots and automations, by the way. It's like... If you had to physically trade through 222 losing trades, that takes a toll on you. I know it does for a lot of traders, but just like the actual ability to consistently trade a strategy like that, even if you go through this year, which this year was not a good year for this strategy. If you just look back a year with 300 trades, it was kind of break even at best down for iron condors, but over the long term did pretty well, right?

And this is maybe what you might expect to see with strategies where you have these ups and downs for different. ticker symbols in different positions. IWM did pretty good for me over the last couple of years.

Some of these other ones that didn't do so well, SPY was on a big run. GLD has had a decent run too. So it hasn't been the best one.

I do have a Google trade in there, which I don't, I usually trade these on tickers. So let me see what that Google position is. Oh, this was an earnings trade that I did just a small $27 loser. That's okay. So that Google trade is in there, but you can see most of the tickers that I have for SPY are all ETFs.

Trade a basket of different ones because I know that they're going to come in and out of favor. Some of those ones are going to be better some years. Some of those ones are going to be worse some years. It all really just depends on kind of how it goes.

So hopefully this video helped out in just kind of understanding a little bit more about trading in sideways markets. Like I said, I like iron condors. I trade them more often than I trade iron butterflies. I don't trade iron butterflies that often.

It doesn't mean it's a bad strategy. It's just my personal preference. I like those wider positions, a little bit better probability of success. A little bit better range of potential profit and I don't have to worry as much about assignment risk.

Not that there's not assignment risk with iron condors. There could be if they start going in the money near expiration. But you don't have to worry about it right away like maybe you do for iron butterflies. As always, if you found this video helpful, please let us know. Add a comment right below.

Give us a like and a share. Just help spread this video. Get it into the hands of more traders that are out there who need to see this. Until next time, happy trading.

Transcript for:Strategies for Trading Sideways Markets

Transcript for:
Strategies for Trading Sideways Markets