Best Neutral Options Strategies – A Must Know For Traders

Best Neutral Options Strategies: Neutral options trading is a strategy employed by options traders when they anticipate that the price of the underlying security will remain relatively stable or within a certain range in the specified time.

In this strategy, traders aim to profit from the lack of significant price movement rather than predicting a clear uptrend or downtrend movement.

Here are the best neutral options strategies discussed that traders can employ to set trades with minimal risks in range-bound markets.

Best Neutral Options Strategies

Let us take a look at the best neutral option strategies with examples

Best Neutral Options Strategies #1 – Straddle

Straddle is an option strategy that combines a call and a pull option of an underlying security. This strategy is employed when traders anticipate a significant price movement but are uncertain about the direction of the movement. And if the market moves significantly, then straddle buyers are set to make good returns on capital deployed.

And if you are not expecting significant movement in the market, then the strategy of Short Straadle and you can stand to gain (Premium received)

Two types of the strategy are:-

1. Long straddle
2. Short straddle

Long straddle

The long straddle consists of two option legs:-

• Buy one ATM put option
• Buy one ATM call option 

with the same strike price and the same expiration date.

The maximum loss in this strategy will be the premium paid as we are the buyer of both a call and put options. 

The maximum profit will be unlimited for buyers if the security moves on either side from the strike price.

There are two breakeven points in this strategy, that is:-

• For increasing spot price, BEP(Break Even Point)= Strike price + Total premium paid.
• For decreasing spot price, BEP(Break Even Point)= strike price – Total premium paid. 

At expiry, if the price moves beyond this break-even points, the strategy makes a profit.

For example,

Consider the spot price of Nifty 50 as 19340. To execute the strategy, buy one CE and one PE at a strike price of 19350 which accounts for a premium of 230 points paid.

• The maximum loss is calculated as 230(premium) X 1lot(50 qt)= 11500.
• For increasing spot price, BEP= 19340 + 230= 19570.
• For decreasing spot price, BEP=19340-230= 19110.

Short Straddle

A short straddle consists of two option legs:-

• Sell one ATM put option
• Sell one ATM call option

with the same strike price and the same expiration date. 

Since option selling has greater risk exposure, more margins are required.

The maximum profit will be limited to the premium paid by the seller.

The maximum loss incurred will be unlimited for sellers if the security moves away on either side from the strike price.

There are two breakeven points in this strategy, that is:-

• For increasing spot price, BEP(Break Even Point)= Strike price + Total premium paid.
• For decreasing spot price, BEP(Break Even Point)= strike price – Total premium paid. 

At expiry, if the price moves beyond this break-even points, the strategy starts incurring loss.

For example,

Consider the spot price of Nifty 50 as 19445. To execute the strategy, sell one CE and one PE at a strike price of 19450 which accounts for a premium of 215 points paid.

The maximum loss is calculated as 215(premium) X 1lot(50 qt)= 10750.

Best Neutral Options Strategies #2 – Strangle

Strangle is an option strategy that combines a call and a pull option of an underlying security. Traders use this strategy when a significant price movement is expected in the near term but unsure about the direction. 

A strangle is similar to a straddle but uses different strike prices.

Two types of the strategy are:-

1. Long strangle
2. Short strangle

Long Strangle

The long strangle consists of two option legs:-

• Buy one OTM put option
• Buy one OTM call option 

with an equal range strike price from the spot price at the same expiration date.

The maximum loss will be the premium paid as we are the buyer of both a call and put options. 

The maximum profit will be unlimited if the security moves either above CE or below PE strike price at expiry. 

The break-even points are:-

• For increasing spot price, BEP(Break Even Point)= CE Strike price + Total premium paid.
• For decreasing spot price, BEP(Break Even Point)= PE strike price – Total premium paid. 

At expiry, if the price moves beyond this break-even points, the strategy makes a profit.

For example,

Consider the spot price of Nifty 50 as 19430. To execute the strategy, buy one CE at 19650 and one PE at 19250 which accounts for a total premium of 70 points paid.

The maximum loss is calculated as 70(premium) X 1lot(50 qt)= 3500.

Short Strangle 

The short strangle consists of two option legs:-

• Sell one OTM put option
• Sell one OTM call option 

with an equal range strike price from the spot price at the same expiration date.

The maximum profit will be the premium paid by the seller.

The maximum loss will be unlimited if the security moves either above CE or below PE strike price at expiry. 

The break-even points are:-

• For increasing spot price, BEP(Break Even Point)= CE Strike price + Total premium paid.
• For decreasing spot price, BEP(Break Even Point)= PE strike price – Total premium paid. 

At expiry, if the price moves beyond this break-even points, the strategy makes a profit.

For example,

Consider the spot price of Nifty 50 as 19440. To execute the strategy, sell one CE at 19650 and one PE at 19250 which accounts for a total premium of 70 points paid.

The maximum profit is calculated as 70(premium) X 1lot(50 qt)= 3500.

Best Neutral Options Strategies #3 – Iron Condor

Iron condor options strategy is employed when the markets are sideways with low volatility. It involves simultaneous buy and sell on OTM put and call options. 

This strategy aims to capitalize on a range-bound market when the prices stay between the sold and bought options strike price.

Two types of strategy are:-

1. Long Iron condor
2. Short iron condor

Long Iron Condor

The long iron condor consists of 4 legs, i.e.:-

• Buy one OTM put option
• Sell one deep OTM put option
• Buy one OTM call option
• Sell one deep OTM call option

The strike prices chosen to Buy and Write should be equidistant from each other at the same expiration date.

In this strategy, the maximum loss is capped at the net premium paid and the maximum profit is calculated as the strike price of the short call – strike price of the long call – premium.

The two breakeven points are:-

• For increasing spot price, Break Even Point(BEP) = long call strike + net premium paid.
• For decreasing spot price, Break Even Point(BEP) = long put strike – net premium paid.

For example,

Consider the spot price of nifty 50 as 19665. To execute the strategy, buy one 19450PE, sell one 19250PE, sell one 200050CE and buy one 19850CE in which a net premium paid accounts to Rs 58.

Short Iron condor

The short iron condor consists of 4 legs, i.e.:-

• Buy one Deep OTM put option.
• Sell one OTM put option.
• Sell one OTM call option.
• Buy one Deep OTM call option.

Of strike prices chosen to Buy and Write should be equidistant from each other at the same expiration date.

In this strategy, the maximum profit is limited to the net premium paid and the maximum Loss is also capped, as we are both buyer and seller of both Call and Put Options.

.The two breakeven points are:-

• For increasing spot price, Break Even Point(BEP) = short call strike + net premium received.
• For decreasing spot price, Break Even Point(BEP) = short put strike – net premium received.

For example,

Consider the spot price of nifty 50 as 19350. To execute the strategy, buy one 18950PE, sell one 19150PE, sell one 19550CE and buy one 19750CE in which a net premium of 50rs is received. 

Best Neutral Options Strategies #4 – Iron Butterfly 

Iron Butterfly is an options strategy that involves combining two vertical spreads of four options, which limits both risk and potential profit.

Traders use this strategy when low volatility is expected and the price stays in a range upon expiration.

Two types of the strategy are:-

1. Long Iron Butterfly
2. Short Iron Butterfly

Long iron butterfly

The long iron butterfly consists of 4 legs, i.e.:-

• Buy one ATM put option
• Sell one OTM put option
• Sell one OTM call option
• Buy one ATM call option

The strike prices chosen to Buy and Write should be equidistant from each other at the same expiration date.

In this strategy, the maximum loss is capped at the net premium paid and the maximum profit is calculated as the high strike – middle strike – net premium received

The two breakeven points are:-

• For increasing spot price, Break Even Point(BEP) = ATM strike + net premium paid
• For decreasing spot price, Break Even Point(BEP) = ATM strike – net premium paid

For example,

Consider the spot price of nifty 50 as 19315. To execute the strategy, buy one 19300PE, sell one 19100PE, sell one 19500CE and buy one 19300CE in which a net premium of 143rs is paid. 

Short Iron butterfly 

The short iron butterfly consists of 4 legs, i.e.:-

• Buy one OTM put option
• Sell one ATM put option
• Sell one ATM call option
• Buy one OTM call option

The strike prices chosen to Buy and Write should be equidistant from each other at the same expiration date.

In this strategy, the maximum profit is capped at the net premium paid and the maximum loss is calculated as the long call strike – short call strike – net premium received

The two breakeven points are:-

• For increasing spot price, Break Even Point(BEP) = ATM strike + net premium received.
• For decreasing spot price, Break Even Point(BEP) = ATM strike – net premium received.

For example,

Consider the spot price of nifty 50 as 19305. To execute the strategy, buy one 19100PE, sell one 19300PE, sell one 19300CE and buy one 19500CE in which a net premium of 145rs is paid.

In Closing 

Having understood the different types of neutral options strategies, it can be safely concluded that the above strategies have a lot of scope and application.

The above strategies implied in markets help option traders to make profits in range-bound markets too rather than trending markets only.

Written By Deepak M

By utilizing the stock screener, stock heatmap, portfolio backtesting, and stock compare tool on the Trade Brains portal, investors gain access to comprehensive tools that enable them to identify the best stocks also get updated with stock market news, and make well-informed investment decisions.