Neutral Option Trading Strategies
Call Calendar Spread – Buy one long term Call with 90 days or greater until expiration and sell one short-term Call with 45 days or less until expiration at same strike price in stable markets. The objective of this trade is to capture time decay since the sold Call will lose value faster than the purchased Call. Repeat sale of another short-term option if time permits on long term option to capture additional time premium. Hold long option if market looks ready to break out in an upward direction.
Entry Rules
Stocks expected to stay in a trading range.
Implied Volatility Skews of sold Call at least 15% greater than purchased Call.
Buy as much time as you can while keeping the net debit of the spread under $2 per contract.
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Put Calendar Spread – Buy one long term Put with 90 days or greater until expiration and sell one short term Put with 45 days or less until expiration at same strike price in stable markets. The objective of this trade is to capture time decay since the sold Put will lose value faster than the purchased Call. Repeat sale of another short-term option if time permits on long term option to capture additional time premium. Hold long option if market looks ready to break out in an upward direction.
Entry Rules
Stocks expected to stay in a trading range.
Implied Volatility Skews of sold Put at least 15% greater than purchased Put.
Buy as much time as you can while keeping the net debit of the spread under $2 per contract.
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Stock Collar – There are two types of Collars, Protective and Appreciating. Both are used for stocks that you own, or want to own, for the long term.
Protective Collar – When you already own the stock and don’t want to sell it, but you are Bearish in the short term. Buy ATM Put and Sell ATM Call to finance the Put. This isn’t really a trading strategy, but is presented here for illustration purposes. The risk is the net debit, if any calculated as the Cost of Put - credit received for sale of Call. If you can make this trade with enough credit to cover your commissions, you have locked your stock price at the strike price of the options until they expire.
Appreciating Collar – When you want to own the stock for the long term, but you are Bearish on the stock or the stock market in the short term. Buy ATM Put and Sell OTM Call to finance the Put. Most profitable when volatility is high and there is a skew between prices of Puts and Calls.
Entry Rules
Bullish expectations for the underlying asset, but concern that overall market or news may cause short term drop in asset price.
Most profitable when volatility is high and there is a skew between prices of Puts and Calls.
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Iron Butterfly - This is a combination trade of the bear call spread and the bull put spread that is similar to the condor. Buy one call at resistance and sell a lower strike call (usually 5 points); and buy one put at support and sell a higher strike put (usually 5 points). Look for a range bound market expected to stay in between the breakeven prices. This trade can be better than the condor when the puts and calls have different implied volatilities.
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Iron Condor – This is a combination trade of the bear call spread and the bull put spread that is similar to the butterfly. Buy one option at support and resistance, and sell two options at different strike prices in between these two levels. Look for a range bound market expected to stay in between the breakeven prices.
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