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 anticipation 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 volatility neutral strategies are generally debit to net debit transactions. Low
volatility neutral strategies are generally net credit to all credit trades. So generally with neutral
strategies we're either expecting the stock price to stay within a certain range or go out of a certain
range in either direction. Since a picture is worth 1000 words many of these are listed below with
their P&L graphs.

High Volatility Neutral

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


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.

(Click on the images to enlarge, click on the back arrow to return to this page.)

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


Reverse Iron Butterfly

Reverse Iron Condor -


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


Iron Butterfly
(combination) - a combination similar to a short straddle, but with protective OTM calls
& puts..

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


Butterfly Spread

Condor Spread -


Short Straddle

Short Strangle -
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