Neutral option trading strategies are strategies that traders use when they expect the price of an underlying asset to remain relatively stable within a certain range. These strategies are employed to profit from low volatility or range-bound markets.
Some common Neutral option trading strategies:
- Iron Condor: An iron condor involves selling an out-of-the-money (OTM) call and an OTM put while simultaneously buying a further OTM call and put with a wider spread. This strategy generates net credit and profits when the underlying asset’s price remains within a specific range.
- Butterfly Spread: The butterfly spread involves using three options with the same expiration date. You sell two options at a middle strike price and buy one option each at lower and higher strike prices. It profits from minimal price movement and maximizes gains if the price expires at the middle strike.
- Straddle: A straddle consists of buying both a call and a put option with the same strike price and expiration date. This strategy profits from significant price movements in either direction. Traders use this when they expect a big move but are uncertain about the direction.
- Strangle: Similar to a straddle, a strangle involves buying an OTM call and an OTM put with different strike prices but the same expiration date. It’s used when expecting volatility but not sure about the direction of the move.
- Iron Butterfly: This strategy combines aspects of the iron condor and butterfly spread. It involves selling an ATM call and put while simultaneously buying an OTM call and put. Like the iron condor, it profits when the underlying asset’s price remains within a specific range.
- Calendar Spread: A calendar spread involves buying and selling options of the same type (both calls or both puts) but with different expiration dates. Typically, the near-term option is sold, and the longer-term option is bought. Profit is achieved if the underlying asset remains near the strike price of the sold option.
- Ratio Spread: A ratio spread involves buying and selling options in a specific ratio. For example, you might sell two ATM options and buy one further OTM option. This strategy profits from moderate price movements in the desired direction.
- Iron Condor with Unbalanced Wings: Similar to a standard iron condor, but with unbalanced spreads, meaning that the width of the call spread and put spread is different. This can be useful when you have a directional bias but still want some neutrality.
- Jade Lizard: This strategy combines the short put of a short strangle with a long OTM call. It’s used when traders are moderately bullish or neutral and want to generate credit while protecting against limited downside risk.
- Double Calendar Spread: Involves two calendar spreads, one with a shorter expiration and one with a longer expiration. This strategy can profit from time decay and low volatility in a neutral market.
It’s important to note that while these strategies offer the potential for limited risk and profit, they also have their own unique risk profiles. Traders should thoroughly understand the mechanics and risks of each strategy and consider their market outlook and risk tolerance before implementing them. Additionally, transaction costs and commissions should be taken into account when trading options.
