Neutral Options Strategies



Neutral Options Strategies - Introduction


So, you wish to profit from options trading even when the market is sideways and stocks are going nowhere?

That's when neutral options strategies come in! Neutral Options Strategies are options strategies that are designed to profit when the underlying stock remains stagnant or within a pre-determined price range.

Neutral options strategies are unique opportunities that only options trading offers. No other financial instruments allow a trader to profit when a stock remains totally still. In fact, the term "neutral" in neutral options strategies does not mean that you profit only when a stock remains at a fixed price all the time. Not at all. Neutral options strategies allows you to profit not only when the stock remains totally still but also when it is trading within a neutral trend bounded by a fixed price range.

This tutorial will elaborate more about the capabilities of neutral options strategies and their underlying logic.


Neutral Options Strategies - Content



Multi-Direction Profit | How Neutral Options Strategies Work | Common Flaw | List of Neutral Options Strategies




Neutral Options Strategies - Multi-directional Profits


While most other materials mistake Neutral Options Strategies as only capable of profiting when a stock remains stagnant, Neutral Options Strategies are really capable of profiting no matter if the underlying stock moves up, down or stagnant! Neutral Options Strategies are not designed to profit only when a stock price remains totally still but are designed to profit when a stock is in a neutral trend. Yes, the term "neutral" in Neutral Options Strategies refers to a Neutral Trend and not totally stagnant price. So, what is a neutral trend? The picture below depicts a neutral trend.

Neutral Trend

Neutral trends typically occur after a significant bull run or bear run. It is a period where the stock price goes sideways, as depicted in yellow above, for a significant period of time before either turning its direction or continuing its previous trend. Neutral trends are characterized by the stock moving within a price range which is pointing sideways or nearly sideways as depicted by the gray lines in the picture above. As you can see, when a stock is in a neutral trend, it really is moving upwards and downwards within a maximum and minimum price channel. Only options trading using Neutral Options Strategies will you be able to profit no matter if the stock is up, stagnant or down within that price channel. This makes Neutral Options Strategies capable of profit in all 3 directions as long as it is within that expected price range! Being able to profit from all 3 directions definitely increases the odds of winning tremendously.

OppiE's Note In short, neutral options strategies can be used as long as you are confident that a stock will remain within a predictable price range no matter how wide that range may be.



How Neutral Options Strategies Work?


Even though there are many Neutral Options Strategies, all of them profit in a neutral trend on the exact same underlying mechanic and that is through time decay of options extrinsic value. Stock Options (or options on any other financial instruments) are the only instruments with depreciating extrinsic values and is also why only through options trading can anyone profit from a neutral trend or completely stagnant stocks.

All Neutral Options Strategies contain short call options and/or put options. Shorting options put time decay in your favor so that those options can be Bought To Close at a lower price than they were shorted, or written, for or allowed to expire totally worthless to the buyer during expiration. This results in a profit.

The Short Strangle illustrates this point most clearly. Shorting out of the money call options allows you to make the whole extrinsic value of those call options as profit if the stock fails to move higher than the strike price of those call options by expiration. Shorting out of the money put options allows you to make the whole extrinsic value of those put options as profit if the stock fails to move lower than the strike price of those put options by expiration. Putting the two together allows you to make money from both the call and put options if the stock remains within the range bounded by the strike price of the call and put options, creating a neutral options trading strategy. As you can see, only through options trading can anyone produce a win like this.

Because Neutral Options Strategies profit mainly on time decay, its overall position theta value will always be positive no matter which neutral options trading strategy is being used. Positive position theta represents the amount of money the position will make on a daily basis. This is also why Neutral Options Strategies are mainly credit spreads with just a couple of exceptions.

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Common Flaw of Neutral Options Strategies


The common flaw or disadvantage of all neutral options strategies is that its profit potential will always be limited. There is never and can never be neutral options strategies with unlimited profit potential. All maximum profit of neutral options strategies can be precisely calculated as the amount of extrinsic value that a position can make is fixed right from the moment it is established. Even though it is a "flaw", it is also an advantage to some options traders who are options trading to meet a strictly controlled ROI mandate. For instance, if you must produce a return of at least 5% on each options trade, you would be able to calculate right from the start if the trade meets your options trading requirement. The ability to calculate your maximum profit right from the start makes options trading much more predictable.



List of Neutral Options Strategies


Here is a list of neutral options strategies classified according to their relative complexity in options trading. Complex Neutral Strategies will have more legs in a single position and would be more complicated in arriving at their maximum profit. Basic Neutral Strategies typically consist of only two legs and would be a lot easier in arriving at their maximum profit.

Basic Neutral Strategies


:: Covered Call
:: Deep In The Money Covered Call
:: Collar
:: Short Straddle
:: Short Strip Straddle
:: Short Strap Straddle
:: Short Strap Strangle
:: Short Strip Strangle
:: Short Strangle
:: Short Gut
:: Calendar Call Spread
:: Horizontal Calendar Call Spread
:: Diagonal Calendar Call Spread
:: Calendar Put Spread
:: Call Time Spread
:: Horizontal Call Time Spread
:: Diagonal Call Time Spread
:: Put Time Spread
:: Horizontal Put Time Spread
:: Diagonal Put Time Spread
Complex Neutral Strategies


:: Butterfly Spread
:: Broken Wing Butterfly Spread
:: Call Broken Wing Butterfly Spread
:: Put Broken Wing Butterfly Spread
:: Condor Spread
:: Call Broken Wing Condor Spread
:: Put Broken Wing Condor Spread
:: Albatross Spread
:: Iron Condor Spread
:: Iron Butterfly Spread
:: Covered Put
:: Call Ratio Spread
:: Call Diagonal Ratio Spread
:: Put Ratio Spread
:: Put Diagonal Ratio Spread
:: Calendar Straddle
:: Calendar Strangle



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