Despite the surprisingly robust September jobs report that just came out, Wall Street hasn’t been that impressive overall, thus necessitating a discussion about options trades for a flat market. Listen, as much as I love talking about safe dividend stocks to buy for a tumultuous market, if the waste matter truly hits the proverbial fan, even the most trusted idea could temporarily falter.
Another factor that bolsters the case for options trades for a flat market is the added avenues for profitable efficiencies. For example, how many times have you thought to yourself: I’d buy XYZ Corp but only if it got down to X price. If it did drop there, you buy. But what if XYZ never got to that magic price point? My goodness – you would have wasted your time.
However, with cash-secured put selling, you can collect maximum premiums if your target security never falls to the underlying contract strike price. Conversely, you can conduct covered call writing to collect premiums on a security that you own but don’t believe will rise materially.
With options trades for a flat market, you can profit from practically any circumstance, just like the smart money.
Based on the latest trends, Apple (NASDAQ:AAPL) appears a tempting prospect for options trades for a flat market. Specifically, if I already own AAPL stock, I’d be interested in collecting a premium by writing (selling) call options. Remember, you want to own the underlying security in case the trade works against you; otherwise, you’d suffer (theoretically) unlimited losses.
Here’s the rationale. As one of the most popular companies in the world, Apple commands incredible pricing power. Just look at how its gross margins rise despite challenges to the consumer economy. People will pay for the latest Apple gadgets and gizmos. However, because it’s such a predictable business, investors don’t anticipate robust growth for AAPL stock.
Yes, shares gained 42% since the January opener. However, they’re flat on a trailing-month basis. If you don’t believe much upside for AAPL remains, writing covered calls will allow you to pick up a premium and make your holdings more “productive.”
Of course, the risk is that if AAPL pops, you may be obligated to sell your holdings. For that, analysts project AAPL hitting $207.69 over the next 12 months.
While options trades for a flat market (or any market cycle) carry distinct risks, you must educate yourself on how they can be shrewd tools to profit from whatever the market throws at you. A case in point is Amazon (NASDAQ:AMZN). Another company that needs no introduction, Amazon continues to dominate the broader e-commerce ecosystem. It’s predictable and trustworthy but that also comes with problems.
Basically, because it’s such a great investment, Wall Street doesn’t really anticipate much upside from here. Yeah, sure, it’s up 49% since the January opener. But in the past one-month period, AMZN slipped more than 7%. Further, its valuation makes seem unlikely that much upside beckons for the industry stalwart. Right now, AMZN trades at a trailing earnings multiple of nearly 101X.
So, if you already own AMZN – keeping in mind that each options contract represents 100 shares – why not collect some income? Again, it just seems unlikely that AMZN will move higher. Here, you can check Fintel’s implied volatility (IV) curve, which seems to indicate that options traders generally anticipate a higher probability of downside than upside.
If you want to do this trade, analysts project AMZN hitting $176.02 in the next 12 months.
One of the big winners in the market, Nvidia (NASDAQ:NVDA) – while presenting risks – may also be a strong candidate for options trades for a flat market. Yes, that almost sounds sacrilegious. After all, Nvidia’s processors help empower artificial intelligence and machine learning protocols. Currently, it appears that everyone is getting on the AI/ML bandwagon. With NVDA behind the wheel, it’s up, up, and away, right?
Eh, maybe not. Certainly, I don’t want to get into any heated NVDA debates with ardent fans. However, just look at the performance. True, NVDA gained nearly 220% since the beginning of this year. However, in the trailing six-month period, this performance slips to 66%. And in the past 30 (calendar) days, it’s actually down – yeah, a shocker – 1%.
So, if you want your NVDA holdings to be productive and simultaneously believe that shares have peaked, writing covered calls may make sense. Of course, one of the key risks is that if NVDA swings decisively higher, you may absorb an opportunity cost (because you’d be forced to fulfill the call option holder’s exercising of the contract).
Overall, analysts project that NVDA will hit $647.04 over the next one-year period.
Switching strategies, utility giant Sempra (NYSE:SRE) may be an ideal candidate for options trades for a flat market. Here, cash-secured put selling may be appropriate, depending of course on your risk profile. With covered call writing, the core risk centers on the obligation to sell the underlying security. Again, that’s why you want to own the stock. If you engage in naked (i.e. uncovered) call writing, you may risk devastating financial pain.
Now, let’s flip it around. If you really believe in a particular company – and most importantly have the cash if forced to buy it – then cash-secured calls give you a possible best-of-both-worlds scenario. If the target security never goes in the money, you collect the maximum premium. But if it does, you will simply buy your desired security at a price with which you’re comfortable.
For Sempra, the beauty here is its natural monopoly. Frankly, no one’s going to oust it from its lofty position. And because Sempra serves much of the lucrative Southern California market, SRE should eventually recover even if it hits a downcycle.
If you’re interested in income collection, the low-side analyst target for SRE is $78.
For all the political controversies that Tesla (NASDAQ:TSLA) CEO Elon Musk generates, it’s undeniable that TSLA represents a powerhouse. Of course, no one can guarantee which electric vehicle brand may survive 10 or 20 years from now. However, given the mass popularity and social integration of Tesla and other Musk ventures – much of which has been supported by government subsidies – TSLA may stand supreme.
However, it’s not moving that much right now. Yes, shares gained 141% since the beginning of this year, an incredible performance. But in the past six months, this stat slips to a bit over 41%. In the trailing one-month period, TSLA gained a very pedestrian 3.6%. So, it’s possible – especially with rising consumer challenges – that Tesla could lose equity value.
Still, as history demonstrates, TSLA tends to bounce back from such negativity. If you believe in the long-term potential of the EV maker, a cash-secured put could be enticing. Just be aware that you should truly pick a strike price with which you’re absolutely comfortable.
To better gauge this comfort point, analysts project the low-side target to be $85.
Five Below (FIVE)
As a discount retailer, Five Below (NASDAQ:FIVE) could be an extremely intriguing idea for options trades for a flat market. Offering products with price targets mostly up to $5 – and few that rise to $25 – Five Below offers a little something for everyone. Let’s face it, even if you’re reasonably well off, inflation touches everything. So, we could all use a discount.
With that core fundamental catalyst in mind, it’s possible that retail investors believe FIVE could swing higher. Unlike other discount retailers, Five Below hasn’t conspicuously sacrificed profitability for higher-volume sales. Its gross margin remains relatively robust, meaning that it’s well-positioned to handle an economic storm. Because of this framework, investors may want to buy FIVE.
You on the other hand may believe in FIVE stock but not in its valuation. For instance, it trades at a forward earnings multiple of 23.95X, worse than 81.64% of its peers. Yikes! So, while you’re waiting for a more de-risked profile, why not collect some premiums? If you believe in this company, it could be a win-win no matter what happens.
For those interested in a cash-secured put sale, the analyst low-side target sits at $175.
For temporary homestays and experiences marketplace provider Airbnb (NASDAQ:ABNB), we’ll dive into a riskier options strategy called the iron condor. This advanced strategy involves selling an out-of-money (OTM) put and an OTM call. Simultaneously, you’re also buying a further OTM put and a further OTM call. These “outer” options represent risk hedging. Should the underlying security remain between the two “inner” strikes, you’ll realize a profit.
To be clear, my discussion of the iron condor assumes that you’re symmetrically buying the same number of contracts for the inner and outer options. Otherwise, if your outer contracts are fewer than the inner, if the security moves against the trade to the upside, you may incur unlimited losses.
What might make ABNB a candidate for advanced options trades for a flat market is that it hasn’t gone anywhere (on a net basis) since late June of this year. Initially, the enthusiasm for ongoing revenge travel sentiments lifted shares. However, investors appear to be digesting whether this narrative will pan out or not.
Also, the analyst rating of ABNB – while standing at moderate buy – is heavily mixed: we’re talking 12 buys, 16 holds and three sells. So, it could just go flat and you’d be able to profit if so.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.