OptioNewton

Neutral & Protective Strategies

More strategies are listed in the neutral section than in the bullish or the bearish section. A few reasons for this; as mentioned before, the direction of the market or stock price often moves very closely to a fair coin toss. Neutral strategies protect against unanticipated moves in the direction opposite the chosen sentiment. Although neutral strategies limit the profit potential somewhat (the first rule of investing is preservation of capital), they can increase the probability of success. And as we've already seen, even small monthly gains can turn into large annual returns. Neutral strategies generally involve buying one or more options while simultaneously selling one or more options. Since when an option is sold it's a credit to the account and when one is bought it's a debit to the account, the net premium of the trade will be less than buying an option alone. This reduces the cost of the trade. Finally, bullish and bearish strategies are relatively simple. They may not be as successful as often, but with simplicity comes fewer choices.  

Neutral Strategies

When it comes to neutral strategies, there is an additional choice to be made in the strategy selection process and that is the anticpation of High Volatility or Low Volatility in the stock price movement. High Volatility is the anticipation that the stock price will make a large move in either direction by opex. Low Volatility is the anticipation that the stock price will remain in a relatively narrow range up to opex. High volatiltiy neutral strategies are generally debit to net debit transactions. Low volatility neutral strategies are generally net credit to all credit trades. Some examples are listed below.

High Volatility Neutral 

Expect a large move in either direction in the underlying stock price by opex.

Debit

Straddle -  is a neutral combination that expects a large move in one direction or the other. An ATM call and an ATM put of the same strike and expiration month are bought. The strike can be below or above the current stock price, but usually near the current stock price. The premium is a debit.

Strangle -  is a neutral combination that expects a large move in one direction or another. An OTM call and an OTM put, both with the same expiration month, are bought. The premium is a debit, but less than for a straddle.

Most other neutral combination strategies are derivatives of the straddle or the strangle.

Net Debit

Combinations

Reverse Iron Butterfly -

Short Butterfly Spread 

Short Condor Spread

Low Volatility Neutral

Expect the underlying stock price to remain within a certain range up to opex day.

Net Credit

Combinations

Iron Condor - a combination similar to a short strangle, but includes selling upper strike calls and lower strike puts to lower the cost of the premium. It has 4 legs and involves buying an OTM call, selling a higher stirke call, buying an OTM put and selling a lower strike put. The premium is a net debit.

Spreads

Butterfly Spread - 

Condor Spread -

Short Straddle -

Short Strangle -