Options Trading Strategies for Neutral Market: One of the main reasons why options trading is so popular is it allows every type of trader to make high returns. Whether you are in a bullish market or a bearish market, you can frame strategies as per the market movement. However, there are times when the market does not move much. It remains in a range or consolidation mode. When there no not much movement in the stock market, it is termed a neutral market. Even for such range-bound market conditions, there are many options and strategies available.
In this article, we list down some of the strategies that you may follow in a neutral market.
- Short Straddle
A short straddle is one of the popular strategies for a neutral market. The only downside of this strategy is that the risk is unlimited. Despite having that risk, this strategy can turn out to be more profitable than many of its peer strategies. In this strategy, you sell at the money call option and put an option of the same expiry. This strategy is a setup for net credit because when you sell options you receive a premium in your account. While taking a position in this strategy always mark the upper and lower breakeven points because the losses are unlimited. If this strategy is executed with precision it can give good returns. However, you must always be cautious when the price starts moving out of the break-even point range.
- Short Strangle
The short strangle or sell strangle is another options strategy for a neutral market. In this strategy, an out-of-the-money call and out-of-the-money put option are sold simultaneously having the same expiry date. The profit and losses in this neutral strategy are limited. The maximum profit that can be earned in this strategy is the net premium received. This strategy is most useful when the market volatility is very low and the price of a stock or index is expected to remain in a certain range.
- Short Iron Butterfly
The short iron butterfly strategy is implemented when you expect the price movement to be very little. This strategy has limited risk and limited reward. This strategy takes benefit of the decay factor. In this strategy, you sell at the money call, buy an out of the money call, sell an at the money put and buy an out of the money put of the same expiry period of the same underlying asset. The strike price can be customized as per your convenience but they must be equidistant. This strategy is popular among traders who prefer taking less risk and earning higher rewards.
- Short Iron Cordon
The short iron cordon options strategy aims to make a profit in a neutral market with limited risk. This strategy is made by buying an out-of-the-money put option, selling out of the money put option with a strike price closer to the current price of the underlying asset, selling an out-of-the-money call option, or at-the-money call option, and buying an out-of-the-money call. This strategy is profitable if the price of the underlying stock or index is within the defined range.
The above-mentioned are some of the commonly followed options strategies in a neutral market. Options trading is an art and one must trade it with caution. Risk management should be the priority. It is also recommended to learn options trading strategies first and then trade with big capital. Start with small capital initially and when you are confident enough then increase your capital.
Once you become a professional options trader, the sky is the limit for making money.
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