How to Profit from a Stock that Does Nothing with Options
There’s a popular saying on Wall Street: bulls make money, bears make money and pigs get slaughtered. Regardless of where you think a stock is going, you can make money – just as long as you aren’t greedy. But what about those stocks that really don’t move at all?
Conservative investors might suggest that investing in stocks with low volatility, as long as they offer a dividend, is a good strategy. But stock yields rarely exceed 4 percent and with yields on the 10-year treasury at 2.35 percent and rising, investors are looking for a better way of dealing with stocks that refuse to react to either bullish or bearish conditions.
One way to play these types of stocks is by using options. There are a number of strategies you can employ that will end up in a profit, as long as the underlying stock doesn’t move beyond a certain range.
Here’s a list of strategies you can use in your portfolio to broaden your horizons.
The Covered Call
As a general rule of thumb, stocks tend to rise in value over time. So if you find a stock that you think will go higher over a long period of time, but will do so slowly rather than jump up in a few months, then covered calls could be just what you need to beef up your profits.
A covered call is when you sell a call with a higher strike price than the current price of a stock you already own. Setting a target date of just a few months out on stock with low volatility will ensure you won’t have to sell your stock because it rose in value too fast, but still nets you the gains received from selling a call.
The Naked Put
If you see a stock that you wouldn’t mind owning if the stock price dropped from its current level, you might consider a naked put. In this type of option strategy, you simply sell a put at or near the current price of a stock you don’t own. If the stock does nothing or goes higher, you keep the profits made from selling the put. If the stock goes down and passes the strike price you sold the put at though, you’ll be obligated to buy the stock at that price. However, if you’ve already done your due diligence and came to the conclusion that the stock is worth owning at that price, then even the worst case scenario might end up being a good decision in the end.
The Short Straddle
For investors willing to take on more risk, a short straddle could be a good option strategy to use on stocks that don’t move. For this high risk strategy, both a call and a put are sold on a stock you don’t own. This leaves a small range in which the stock needs to stay to make a profit, but comes with high risk as large movement in either direction will end up in a loss. Because of the large degree of risk involved, this strategy is best left to investors who have a deep understanding of option trading and understand the risks involved.
There are many other creative option strategies that can be used to take advantage of stocks with low volatility. Multiple combinations can be used to generate profits from any given scenario. If you want to try your hand at options on a stock that doesn’t move, make sure you perform your due diligence before making any investments.