3 Best Direction Neutral Options Trading Strategies
While this is technically accurate, in the context of options trading the word has a slightly broader meaning. When we talk about neutral trading strategies, we are talking about strategies that not only profit from an underlying security staying at the same price but also profit when that security moves within a tight range of prices.
When the price of a security goes up and down by small amounts over a period of time, it's said to be moving sideways. When a price is moving sideways the underlying security is in what's known as a neutral trend.
During such a trend the price of the underlying security is consistently going up and down, but not usually by a huge amount and proven methods of making money online always remaining with a certain range.
A neutral trend will typically occur after a sustained increase in price or a sustained decrease in price when the price starts hitting levels of resistance or support accordingly. These trends can continue for weeks or even months at a time.
Stock traders and other investors will really struggle to profit under these circumstances and they will typically leave securities that are in a neutral trend alone. However, options traders can take advantage of them by using appropriate strategies. Advantages of Neutral Strategies The biggest advantage of neutral options trading strategies is really the simple fact that they exist.
Many financial instruments go through prolonged periods of being neutral, or in a neutral trend, and this gives options traders plenty of chances to generate returns. It's somewhat obvious that the more potentially profitable opportunities there are, the greater the chance there is of being successful on a consistent basis.
The other main advantage of these strategies is that by using them you can profit from three different outcomes.
Neutral Market Trading Strategies
If the underlying security increases in price or decreases in price, you will still make a profit, providing the price movements stay within an appropriate range. Some strategies options neutral strategies the price of the underlying security to remain in a very tight range to return a profit, while others can profit from a wider range. To some extent, options neutral strategies can control just how wide you want the range to be and this is another example of just how flexible options trading can be.
Other advantages include the fact that you can turn time decay into a positive and also control your risk exposure to some extent.
Combined delta would be Delta neutral in case of Short Straddle suggests profit is capped. If the underlying assets move significantly, the losses would be substantial. Gamma: Gamma of the overall position would be Negative. Vega: Short Straddle Strategy has a negative Vega.
Options neutral strategies using some of the more basic strategies, it's very simple to work out the maximum potential profit and maximum potential loss, and this can be very useful for when planning trades and managing risk. Finally, the fact that there are so many different strategies you can use means you have plenty of choice and a good chance of finding one that fits well with your personal objectives. The biggest drawback is the fact that the potential profits of these is always limited, because the maximum amount of profit that can be made from any trade is essentially fixed at the moment it's executed.
Neutral Options Trading Strategies (In-Depth Tutorials)
Another disadvantage is that the strategies all require at least two transactions, and some of them more, so you will potentially pay a fair amount in commissions. This is actually true of most options trading strategies.
Also, some of them can be quite complicated and certainly not suitable for beginners. These disadvantages are all relatively minor though, and it should be clear that they are far outweighed by the benefits.
List of Neutral Strategies Below, we have listed a range of neutral options trading strategies that are commonly used by options traders.
If you are struggling to choose a suitable strategy, you may like to take a look at our Selection Tool.