A lot of people are asking how to make money in any market. The answer is by using neutral options strategies. Neutral options are the best way to take advantage of a sideways market, and they can be used to make money in any market condition. In this article, we will discuss some of the best neutral options strategies for today’s market. We will also talk about how to use these strategies to generate income and protect your portfolio.
We will answer the critical questions:
- What Are Neutral Options Strategies?
- How Do We Use Options To Make Money In Any Market?
- What Are The Benefits of Neutral Options Strategies?
- What Types Of Stocks Are Best For Neutral Strategies?
- When Should You Use Neutral Options Strategies?
- What Are The Risks With Using Neutral Options Strategies?
- What Is The Best (DTE) Timeframe For Placing Neutral Options Strategy Trades?
- What Is The Best Way to Adjust and Manage Neutral Options Strategies?
- When Do We Close Neutral Options Trades?
- Conclusion
What Are Neutral Options Strategies?
Neutral options strategies are designed to take advantage of a sideways or range-bound market. These strategies can be used to generate income, protect your portfolio, or both. The most common neutral options strategies are straddles, strangles, and iron condors.
A straddle is an options strategy that involves buying a call and a put with the same strike price and expiration date. The straddle is a neutral strategy because it profits if the stock moves up, down, or sideways.
A strangle is an options strategy that involves buying a call with a strike price below the current stock price and a put with a strike price above the current stock price. The strangle is a neutral strategy because it profits if the stock moves up, down, or sideways.
An iron condor is an options strategy that involves buying a put and a call with different strike prices and expiration dates. The iron condor is a neutral strategy because it profits if the stock moves up, down, or sideways.
How Do We Use Options To Make Money In Any Market?
To make money in any market with options, we need to use neutral options strategies. These are strategies that involve buying and selling options with different strike prices but with the same expiration date. We can use these strategies to take advantage of a sideways market and to protect our portfolio in a bear or bull market.
What Are The Benefits of Neutral Options Strategies?
There are many benefits to using neutral options strategies. First, they allow us to make money in any market condition. Second, they help us protect our portfolio from downside risk. Third, they provide us with the opportunity to generate income. Fourth, they offer the flexibility to adjust our position as the market moves up or down.
What Types Of Stocks Are Best For Neutral Strategies?
Neutral option strategies can be used with almost any type of stock. They are effective when used with stocks that are not highly volatile. Stocks that have a low beta are good candidates for neutral options strategies since they tend to not move a lot.
The downside to stocks that are low beta that doesn’t move a lot is that they normally don’t pay a lot of premium.
Stocks with high IV are typically the best candidates for neutral options strategies. This is because they have a lot of premium and they tend to move more than low IV stocks. However, we want these stocks to not move and stay within a range. I like to look for stocks that have already had either a big move up or a big move down.
When Should You Use Neutral Options Strategies?
Neutral options strategies should be used when the market is expected to move sideways. These strategies are most effective in a range-bound market.
An ideal time to put on neutral trades is when IV (Implied Volatility) is high. This is because the option premiums that we can collect are higher. We can sell options to other traders who are willing to pay a premium for the chance to make money if the stock moves.
When is IV high? Typically IV is high after a big down move in the market like we have had recently. There is fear in the market and many are concerned that we will be entering a long-term recession. With this being the case, it is an ideal time to utilize neutral options strategies.
The thinking is that since the market has already been hit and is down, it won’t move much lower. At the same time and for the reasons, we don’t expect the stock to explode up in price. Stocks typically don’t move up as fast as they do down. This is due to the reasons for the market and stock being down (like the possibility of a recession) are likely not going to change right away.
What Are The Risks With Using Neutral Options Strategies?
There are risks with using neutral options strategies. There are potential losses that can occur if the market moves against your position. If there is a large move up or down, then we can lose money.
It is also important to remember that with any options trade, we are using leverage. Leverage can magnify both profits and losses.
What Is The Best (DTE) Timeframe For Placing Neutral Options Strategy Trades?
The best timeframe for placing neutral options strategy trades is typically 30 to 45 DTE (Days To Expiration). This gives enough time to collect premium from theta decay.
Even though we are placing trades with 30-45 DTE, it doesn’t mean that we want to hold the options until expiration. The math and statistics show that rolling at around 21 DTE is ideal for optimizing the premium collected versus the risk of the options going ITM in the money. As we get closer to expiration the gamma of the options starts to increase and there is more chance for the options to move ITM.
What Is The Best Way to Adjust and Manage Neutral Options Strategies?
The best way to adjust and manage neutral options strategies is to roll at around 21 DTE days to expiration. Neutral options trades are typically closed before the expiration date. We like to readjust or close at around 21 DTE (Days To Expiration). By doing this we give the trade plenty of time to work and gain the theta decay but we are not too close to expiration where things can get dicey.
When Do We Close Neutral Options Trades?
We close options positions for winning strangles and iron condors when they reach 50% of max profit. Straddles move quicker and are generally closed at 25% of max profit.
As discussed above, we close and roll to the following month at 21 DTE if there is still a high IV and premium to be made in the trade. If the IV is lower and/or we no longer have the belief that the stock will move in the direction we want, then we can choose to close the trade completely. At this point, we can look for a different underlying and trade.
Conclusion
Neutral options strategies are a great way to make money in any market condition. They offer many benefits, including the ability to generate income, protect your portfolio from downside risk, and provide flexibility to adjust your position.
If the stock price moves in your favor, you may choose to close the trade early to lock in profits.
Management of neutral positions is critical to success. Rolling at 21 DTE days to expiration and closing at 50% of the max profit are two key management techniques that will help you succeed with this strategy.
As always, please use proper risk management when trading options. Never risk more than you are willing to lose and only use options with a small portion of your available investment funds as you are learning. Options are leveraged investments and can result in losses that exceed your initial investment.
Before trading options, please go through this FREE Options Training.
I hope this article has helped you better understand how to trade neutral options strategies. If you have any questions, please don’t hesitate to reach out to me.
Happy trading!