I often break down the market or individual equities into five separate categories: bullish, bearish, neutral, non-bullish and non-bearish. The first three are most likely understandable, but non-bullish and non-bearish might need a little explanation. To me, non-bullish is when you are fully bearish on the market or individual equity but believe resistance levels will hold if tested. Non-bullish is just the opposite. You are not exactly bullish but believe support levels will hold if tested. Let’s take a closer look at non-bearish specifically.
Generally, when the market and stocks are moving higher or sideways, I like to say I have a non-bearish outlook. As I said above, I believe the market or individual stocks will move higher or at least not a whole lot lower. As an option trader, there are three main strategies that pop into my head for a non-bearish outlook: bull put spread, call calendar and call butterfly.
Bull Put Spread
Of all the non-bearish strategies, the bull put spread is the top choice. Selling an out-of-the-money vertical put spread allows the option trader three out of four ways to profit especially if the short put strike is at a potential support level that is expected to hold. The underlying can move higher, trade sideways or even move a little lower and the spread can profit.
Buying a neutral to a slightly bullish call calendar can also take advantage of a non-bearish outlook. A long calendar allows the option trader to potentially have some positive theta to offset some negative delta if the market or underlying moves lower. A drawback could be if the market or equity moved too much higher.
Just like the long calendar, a long call butterfly can also benefit from a neutral to slightly bullish outlook depending on how it is structured. Positioning the body of the butterfly (short calls) at a slightly bullish area from where the underlying is currently trading like a resistance level can give an option trader a chance to profit depending on the break-evens of the butterfly. Just like the long calendar, a move to or beyond the high or low long strikes would not be beneficial.
As an option trader, being able to read the market and put the odds on your side can help you tremendously. And knowing which particular option trades to consider based on an outlook can really take your trading to another level.
Senior Options Instructor
Market Taker Mentoring, Inc.