NEUTRAL MARKET TRADING STRATEGIES

A major reason why trading options is so popular is because of the number of opportunities there are for making profits. For example, unlike other forms of investment, options give traders the chance to profit when an underlying security remains neutral  i.e. it doesn’t move in price.

This function is unique to options, because there are no other financial instruments that can be traded to generate profits from a lack of price movement. There are a large number of neutral options trading strategies (also known as non-directional strategies) that can be used when you have a neutral outlook on an underlying security, and if you can gain a good understanding of these then you will open up many opportunities for making profits.

On this page we explain the concept of a neutral trend and discuss the advantages and disadvantages of using neutral trading strategies.

What is a Neutral Trend?

Advantages of Neutral Strategies

Disadvantages of Neutral Strategies

What is a Neutral Trend?

In investment terms, the word neutral is generally used to describe a financial instrument that doesn’t move in price. 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. This is because if you plotted the price movements on a graph, the graph line wouldn’t show any real incline or decline, but it would basically 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 it’s 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, only 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. Being able to profit from stocks and other financial instruments that remain relatively stable in price gives investors and traders who use options many more opportunities than those who don’t.

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 are there when you learn these strategies and the greater chance are, 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. If the underlying security doesn’t move at all, you will make a profit. 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 need 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, you 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 a greater extent. When 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.

Disadvantages of Neutral Strategies

There aren’t many major disadvantages when it comes to using strategies of this type. It is a 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 but the chances of getting the profit are much more  when compared to any other strategies

These disadvantages are all relatively minor, and it should be clear that they are far outweighed by the benefits.

We are specialized in teaching Delta neutral Non- directional trading strategies.