Today we’re going to look at some of the top option trading strategies for any market condition. As I’m sure you have noticed, the market can be a very unpredictable beast. At times it can leave you scratching your head and crying. However, one thing is for certain: There is a strategy for anything the market can throw at you. What is not to like about that, right? The problem is, many option traders do not have a solid grasp of what option strategy works best for each market condition.
On the Side of the Market
You might have heard traders talk about the “trend is your friend” and thought that it only applies to individual equities or ETFs, for example. But the trend can also be your friend when it comes to the overall market. Understandably, not every underlying is a “market” stock and just because the market moves higher does not mean your stock will follow suit. I think most traders would agree that they would rather have a bearish position on when they believe the overall market will at least not move substantially higher or vice versa.
Five Market Conditions
There are five market conditions I like to use to break down the overall market. I’ll define each below with potential option strategies that match the market for both swing and investment option trades. Clearly there are many option strategies that can be discussed below but these are the top strategies in my opinion for the market’s outlook.
A market is bullish when it is in an uptrend (higher pivot highs and lows), breaking a substantial resistance level or reversing higher at a substantial support level.
If you are bullish on the market and/or the underlying (let’s hope both), consider long calls, bull call spreads and bullish time spreads (calendars and diagonals), and bullish long call butterfly spreads.
A market is bearish when it is in a downtrend (lower pivot highs and lows), breaking a substantial support level or reversing lower at a substantial resistance level.
If you are bearish on the market and/or the underlying (again, let’s hope both), consider long puts, bear put spreads and bearish time spreads (calendars and diagonals), and bearish long put butterfly spreads.
A market is neutral when it has been trading between support and resistance levels both horizontally or diagonally for a fair amount of time.
A plethora of option strategies can take advantage of a neutral environment. Condors and iron condors, butterflies and iron butterflies, long calendar spreads, and covered call and cash-secured puts for investors.
For this outlook, the market may not be exactly bearish, but potential resistance levels have a high probability of not being broken due to lack of buyers. In other words, resistance levels are expected to hold.
A non-bullish market can be a perfect opportunity for bear call spreads, neutral to slightly bearish long put time spreads and covered calls for investors.
For this outlook, the market may not be exactly bullish, but potential support levels have a high probability of not being broken due to lack of sellers. In this case, support levels are expected to hold.
A non-bearish market can be an optimal scenario for bull put spreads, neutral to slightly bullish long call time spreads and cash-secured puts for investors.
Understanding the market environment is just one of many things an option trader needs to know when he or she is active in the market. By no means was this a complete breakdown of all the option strategies. But your trading plan should have at least one for every conceivable environment out there. If it does, it will go a long way toward your potential success.
Senior Options Instructor
Market Taker Mentoring, Inc.