Neutral Spread: What is it?

Neutral spread options trading strategies enable traders to make profits even when the price of the underlying security neither rises nor falls. Traders use these strategies when they don’t expect prices to move significantly in either direction. Therefore, it is important to learn about neutral spread strategies when the market situation is neither bullish nor bearish. 

If you want to learn about neutral spread options trading strategies, then you are on the right platform. In this article, we are going to explain the different types of strategies you can use in neutral market conditions. Let’s begin right away. 

Types of neutral spread strategies

There are different types of neutral spread options trading strategies that enable you to capitalize on different market conditions. Let’s discuss each one separately. 

1. Neutral calendar spread strategy 

A neutral calendar spread strategy enables option traders and investors to gain profit during stagnant market conditions. The strategy involves buying long-term call options and simultaneously selling an equal number of at-the-money near-month call options or out-of-the-money call options. Additionally, all options must have the same underlying security with the same strike price. 

A neutral calendar spread strategy is one of the most exquisite strategies for near-month option trading. It enables traders to make significant gains when the price of the underlying security doesn’t increase or decline much. The premiums earned at the time of writing options contracts become the gains of the traders following this strategy. 

2. Neutral option spread strategies

Neutral option spread strategies are among neutral spread strategies to trade options when it becomes really difficult to predict upcoming market conditions. However, the difficulty lies in choosing one strategy from multiple neutral option spread strategies. You need to know all strategies to make a smart decision. 

1. Covered put

Covered put neutral spread strategy involves buying stocks or using stocks already owned and selling put options to earn premiums. This is slightly bearish from neutral market sentiment. The premiums earned stay with the trader.

2. Covered call

The covered call neutral spread strategy involves buying stocks or using stocks already owned and selling call options to earn premiums. This is a useful strategy to protect your portfolio besides earning premiums as your gains. 

3. Covered call collar

A covered call collar is an improved covered call strategy. It involves buying a put option on top of the covered call position. Why so? Because it offers a hedge against losses if the price of the underlying asset falls dramatically. Thus, it promises limited maximum loss but unlimited profit potential. 

4. Call ratio spread 

Call ratio spread involves holding an unequal number of long and short options positions where the number of options depends on a particular ratio. 

5. Condor spread

The condor spread strategy involves selling four call options – one at a lower strike price while the rest at a higher and higher strike price. Traders seeking capitalization on high/low volatility adopt this strategy to make substantial profits. 

6. Wide condor spread or Albatross spread

Wide condor spread or albatross spread is another neutral spread strategy that also involves four transactions just like condor spread. It is quite a useful strategy during neutral market conditions. However, this is a complex strategy and therefore, isn’t suitable for beginners. 

7. Butterfly Spread

A butterfly spread is a neutral spread strategy that offers a higher winning probability but limited profit potential. It is another strategy that involves four transactions and a combination of a bull spread and a bear spread. This is an excellent strategy if the price doesn’t move significantly in either direction. However, this is also a complex strategy and difficult to implement. 

8. Delta neutral calendar spread

Delta neutral calendar spread is another strategy that is highly useful for the trading of short-term options. It involves buying long-term call options and simultaneously selling near-month at-the-money or slightly out-of-the-money calls of the same underlying security and same strike price. Just like the neutral spread strategy, the premiums earned at the time of writing options contracts become the gains of the traders following this strategy. Although this strategy offers limited profit potential, it also limits risk.

The wrap-up

If you want to earn profits during stagnant market conditions where neither prices rise nor decline, neutral spread strategies are your best friends. These are the strategies that revolve around capitalizing on the lack of price movements of the underlying security. Some strategies are quite easy to implement while some are highly complex. Whether you use a neutral calendar spread strategy, Delta neutral calendar spread strategy, or neutral option spread strategy, it is important to learn about them before implementing them in real trading.