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 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.
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.
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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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"Probably The Most Accurate Stock Picks In The World..."
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.
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