Options Trading Strategies designed to profit from neutral market conditions where prices remain stagnant or within a very narrow trading range.
Frontspreads - Introduction
Anyone can profit when stocks go up or down trading just stocks but only through options trading can you profit even when stocks remain stagnant! Frontspreads,
or neutral options trading strategies, are creative combinations of stock options which profits through the sale of call and put
options and then hoping that they expire worthless. More technically, frontspreads profit primarily through time decay and being short
Being short theta, the erosion of
extrinsic value through
time decay works in your favor, gradually increasing the value of your position as
expiration draws near. Frontspreads therefore provide an additional profit opportunity if a stock is expected to remain relatively stagnant through
Butterfly Spread - The grandfather of all Frontspreads.
The Butterfly Spread is probably the most popular of all frontspreads, due to the fact that it is a debit spread which anyone can put on with
a low level trading account.
Condor Spread - A cousin of the Butterfly Spread with a
wider profitable range but a lower maximum profit potential.
Iron Butterfly Spread - The credit spread
version of the Butterfly spread with both higher maximum profit potential and a wider profitable range.
Iron Condor Spread - The credit spread version of
the condor spread, having the highest maximum profit potential of the 4 variants while producing a wider profitable range than the condor
Short Straddle - The selling of a Long Straddle. This
is a completely naked, uncovered position with potentially unlimited loss. All 4 frontspreads above have limited loss potential, which means
that there is a limit to how much the position can lose if the stock moves dramatically.
Short Strangle - The selling of a Long Strangle. This
results in a lower profit than a Short Straddle but a wider profitable range.
Drawbacks of Frontspreads
The main drawback of frontspreads is that periods of stagnation in both the market as well as individual stocks are relatively short and
unpredictable. Stocks rarely remain stagnant for long and frequently breaks strongly and suddenly to upside or downside, resulting in big
losses for frontspreads. That is why understanding the profitable range of the individual frontspread strategies are so important. Frontspreads
such as the Butterfly spread with extremely narrow profitable range needs to be used with extreme caution. Furthermore, the most profitable
frontspreads are always the credit spread ones such as the Iron Butterfly Spread or the Iron Condor Spread. These are inaccessible to the
newbie options traders as low level trading accounts do not usually allow the use of credit spreads.
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Options involve risk and are not suitable for all investors.
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