Neutral Option Positions

With these kinds of positions, you make money regardless of price direction. The only way to lose, is if the price of the underlying moves too far in either direction. But as you will see, you can structure these trades so you have a very wide profit zone, with a high probability the price will stay in the profit zone. In addition, you can make adjustments, if necessary, to manipulate the profit zone. You can find out more about this strategy in David L. Caplan's Book "The New Options Advantage" in The PitMaster's Bookstore.

To enter into a neutral options position, all you have to do is sell one or more out-of-the-money call options and, at the same time, sell one or more out-of-the-money put options. For example, if June T-bond futures are trading at 110, you might sell the 116 call and the 104 put.

If the price of June T-bond futures is anywhere between 104 and 116 when the futures contract expires, you get to keep all of the premium you collected from the options you sold. You can see, this strategy provides a wide profit zone.

When to use this strategy:

Anytime the market is in a trading range (even a wide trading range is ok). Since most markets are in trading ranges 65% of the time (or more), you will get a lot of use out of this strategy.

Success Factors:

	Make sure you have at least an 80% probability of success. What this means is, based on the statistical volatility of the underlying asset, there is an 80% or better probability that the price of the underlying asset will stay within the profit zone.
	To obtain this high probability, you must sell options that are far enough out-of-the-money. Also, make sure that the premium you collect for selling the options is worth your while.
	Don't put on this trade when statistical volatility is close to its 2 year low, because as stated earlier in Strategy #1, that is usually right before the market makes a big move.
	Conversely, when statistical volatility is close to its 2 year high, often times the market will go into a trading range (after having been in a trend). Also, implied volatility will usually be high at this time (and along with it, high premiums). So, the combination of a market entering a trading range and having high implied volatility as well, would be a great time to use this strategy.

Making Adjustments:

Let's continue with the our example:. T-bond futures are trading at 110 and you sold the 104 put and the 116 call options. If the price of T-bond futures starts to move one way or another, you can adjust your position:

If the market is rising:

	If T-bond futures moves from 110 up to 112, you could sell an additional put option at one strike price higher than before. In this case, you could sell one 106 put option and continue to hold your short position with the 104 put and the 116 call. This would have the effect of shifting the profit zone up a little higher.
	If the market continues to rise, you could then sell the 108 puts and so on.
	If the price of T-bond futures gets up to around 114, you would buy back the 116 call option, because you don't want to take a chance that it might go in-the-money.

If the market is falling:

	If T-bond futures moves from 110 down to 108, you could sell an additional call option at one strike price lower than before. In this case, you could sell one 114 call option and again, continue to hold your short position. This would have the effect of shifting the profit zone down a little lower.
	If the market continues to fall, you could then sell the 112 calls and so on.
	If the price of T-bond futures drops to around 106, you would buy back the 104 put option.

By making these kinds of adjustments, you can effectively shift the profit zone up or down as desired, allowing time decay to eat away at the options you sold (so you can keep the premium you collected).