Several weeks ago, I looked at option trades for a non-bearish outlook. In this blog, we will look at some non-bullish options so to speak. To recap from my previous post, 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 fully 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-bearish is just the opposite as we previously discussed.) Let’s look at non-bullish specifically.
Generally, when the market and stocks are moving lower or at least not remotely higher, I like to say I have a non-bullish outlook. This means I believe the market or individual stocks will move lower or at least not a whole lot higher. As an option trader, there are three main strategies that pop into my head for a non-bullish outlook. Let’s explore them below.
Bear Call Spread
Just as the bull put strategy leads the way for non-bearish strategies, the bear call spread has to be the top choice for a non-bullish outlook. Selling an out-of-the-money (OTM) vertical call spread allows the option trader three out of four ways to profit especially if the short put strike is at a potential resistance level that is expected to hold. The underlying can move lower, trade sideways or even move a little higher and the spread can profit.
Buying a neutral to slightly bearish put calendar can also take advantage of a non-bullish 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 higher. A drawback could be if the market or equity moved too much lower as well. Using puts instead of calls especially when choosing strikes lower than where the underlying is trading for a calendar usually gives the option trader tighter bid/ask spreads. Generally, OTM options are cheaper with tighter spreads.
Just like the long calendar, a long put butterfly can also benefit from a neutral to slightly bearish outlook depending on how it is structured. Positioning the body of the butterfly (short puts) at a slightly bearish area from where the underlying is currently trading like a support 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 the high or low strikes would not be beneficial.
We have now talked about both non-bearish and non-bullish potential option strategies. Applying the correct strategy based on the outlook is imperative for your potential success. We will continue to go through bullish, bearish and neutral strategies in the near future.