As we continue our look at option strategies based on the expected move or non-move, today we’ll explore a neutral outlook. The beauty of options is they allow option traders to profit when there is a neutral bias. Trying to do that with a stock position, for example, is a bit difficult.
Having a neutral outlook on the market or underlying is when the chart shows sideways action. Many times the underlying will be trading between horizontal support and resistance levels. The underlying has trouble moving higher because of resistance and then moves lower. When the underlying moves lower, it has trouble breaking support and usually moves higher. Let’s look at several option strategies to consider either as a swing trader or investor.
Condors and Iron Condors
Buying a condor or selling an iron condor is a perfect way to potentially capture a profit from a neutral bias. Both strategies will profit if the underlying stays between the short strikes, particularly close to or at expiration. The break-evens on the spreads are even outside the short strike range.
Butterflies and Iron Butterflies
Like condors, both the long butterfly and the short iron butterfly can profit if the underlying remains near the short option strikes. The butterfly spreads have a bigger range for the max profit, but both pretty much do the same just with slightly different risk/reward scenarios and probabilities.
The long calendar is one of my favorite option strategies. A neutral long calendar can profit from positive theta and potentially positive vega. The best-case scenario is that the short option expires exactly worthless (at the short strike’s expiration) and the long option that is at-the-money has additional premium from theta.
What if the underlying or market is trading sideways, but you believe eventually it will move higher or lower? A condor or iron condor may not be appropriate. For instance, what if a stock is trading sideways but is holding a bullish base and you believe it will eventually move higher? A short iron condor would limit or wipe out gains if the stock moved higher. A bull put spread might be more appropriate since it can profit if the stock just stays above the short put strike at expiration.
Covered Calls and Cash-Secured Puts
I did not forget investors who are using options. Selling covered calls to generate premium and profits when the underlying is stagnant and selling cash-secured puts at or below potential support levels to also generate premium and potential profits can be game-changing moves too.
Senior Options Instructor
Market Taker Mentoring, Inc.