Neutral Trading Strategies
In the previous Learning Center Article, Options Trading Strategies Top Ten Reviews discussed several options trading strategies. Bullish and bearish trading strategies were discussed. Next, we will explore neutral trading strategies as a final portion of this segment.
Investors often employ neutral trading strategies when they are having difficulty predicting whether the underlying security will increase or decrease in value. Some of the neutral trading strategies that are employed are used below:
The straddle allows investors to hedge their bets. Those who use this strategy often purchase the underlying stock for a call and a put. The underlying security, in this instance, possesses both the same price and expiration date.
When investors purchase options, it is called a long straddle. The short straddle occurs when the options are sold. With this strategy, investors may win or lose depending upon the direction the underlying stock price takes.
Options contracts that are purchased out-of-the-money are called strangle contracts. The underlying stock will, in this instance, have a higher strike price than the market price. This strategy is employed with a call option. If the strategy is used with a put option, the underlying stock will have a strike price lower than a market price. Investors find this trading strategy desirable, because they can obtain the stock for a lower premium. This option is offered to help investors avoid losing money if the stock is sold immediately. Therefore, the lower premium serves as a handicap.
This is a complex strategy that involves four simple steps. Investors employ this strategy, when there is no volatility in the underlying stock price. The four steps are as follows:
- Purchase an in-the-money call with a low strike price.
- Purchase an in-the-money call with an even lower strike price.
- Purchase an out-of-the-money call with a high strike price.
- Purchase an out-of-the-money call with an even higher strike price.
When the investor achieves a net profit, then the position has been successfully established.
This strategy involves purchasing an in-the-money call option and an in-the-money put option at the same time. Both the underlying stock and expiration dates should be the same for both options.
Investors find this strategy desirable because it allows them to make unlimited profits. There is very little risk involve in this particular strategy.
Investors must employ three steps to complete the butterfly strategy.
- Execute a long call at a strike price that is low.
- Execute two short calls at a median strike price.
- Execute a long call at a higher strike price.
All four options should have equivalent expiration dates.
Demand, in options, is determined by volatility and price. Both increase when the demand increases. When the volatility of a call is greater than the volatility of equivalent puts, then this is termed a positive risk reversal. Investors deem this strategy a high leverage technique. Instead of price quotes, options dealers will quote volatility.
Time or Calendar Spread
To employ this strategy, buy two options and sell two options with identifying variables identical, except the expiration dates. Investors will gain the difference in the two prices.
This will conclude our review of options trading strategies. To obtain more information on options trading, review the following websites:
Stock analysis software incorporates several trading tools to assist with the aforementioned strategies. Options trading analysis tools are offered in most of the stock analysis software packages mentioned on Top Ten Reviews. Top Ten Reviews recommends Xtend by Options Xpress and others mentioned on the website. Each will assist you in your investing endeavors.