Neutral Option Strategies
The most popular neutral (or non-directional) option strategies are:
a. Calendar Option Strategy:
The calendar option strategy is a combination of two expiry option contracts. It involves shorting the ATM (at-the-money) call option & put option contract of near expiry & buying an ATM (at-the-money) call option & put option of the next expiry.
Directional view: Neutral
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Limited
Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Neutral
Unfavorable Scenario:
a. The asset price remains out of the breakeven range
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
b. Short Straddle:
Short straddle options strategy is a combination of shorting an ATM (at-the-money) call option contract & ATM put option contract.
Directional view: Neutral
Implied Volatility view: Decrease
Max loss: Unlimited
Max Profit: Limited
Greeks impact:
Increase in IV: Negative
Theta Decay: Positive
Delta: Neutral
Unfavorable Scenario:
a. The asset price rise or falls significantly from the shorted strike price
b. Increase in Implied Volatility (IV)
Payoff Diagram:
c. Short Strangle:
Short strangle options strategy is a combination of shorting an OTM (out-of-the-money) call option contract & OTM put option contract.
Directional view: Neutral
Implied Volatility view: Decrease
Max loss: Unlimited
Max Profit: Limited
Greeks impact:
Increase in IV: Negative
Theta Decay: Positive
Delta: Neutral
Unfavorable Scenario:
a. The asset price rise or falls significantly from the shorted strike price
b. Increase in Implied Volatility (IV)
Payoff Diagram:
d. Long Iron Butterfly:
Long Iron Butterfly is a four-leg options contract. It involves the same expiry buying OTM (out-of-the-money) call option contract & put option contract & selling ATM (at-the-money) call option & put option contract.
Directional view: Neutral
Implied Volatility view: Decrease
Max loss: Limited
Max Profit: Limited
Greeks impact:
Increase in IV: Negative
Theta Decay: Positive
Delta: Neutral
Unfavorable Scenario:
a. The asset price rise or falls significantly from the shorted strike price
b. Increase in Implied Volatility (IV)
Payoff Diagram:
e. Long Iron Condor:
Long Iron Condor is a variation of long iron butterfly strategies. It includes shorting a higher strike from ATM (at-the-money) call option & a lower strike from ATM put option and buying OTM (out-of-the-money) call option & put option.
Directional view: Neutral
Implied Volatility view: Decrease
Max loss: Limited
Max Profit: Limited
Greeks impact:
Increase in IV: Negative
Theta Decay: Positive
Delta: Neutral
Unfavorable Scenario:
a. The asset price rise or falls significantly from the shorted strike price
b. Increase in Implied Volatility (IV)
Payoff Diagram:
f. Short Iron Butterfly:
Short Iron Butterfly is a four-leg options contract. It involves the same expiry selling OTM (out-of-the-money) call option contract & put option contract & buying ATM (at-the-money) call option & put option contract.
Directional view: Non-Directional
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Limited
Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Neutral
Unfavorable Scenario:
a. The asset price remains sideways on in a small range
b. Decreaase in Implied Volatility (IV)
Payoff Diagram:
g. Short Iron Condor:
Short Iron Condor is a variation of Short Iron butterfly strategies. It includes buying a higher strike from ATM (at-the-money) call option & a lower strike from ATM put option and shorting OTM (out-of-the-money) call option & put option
Directional view: Non-Directional
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Limited
Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Neutral
Unfavorable Scenario:
a. The asset price remains sideways on in a small range
b. Decreaase in Implied Volatility (IV)
Payoff Diagram:
h. Long Straddle:
Long Straddle is the combination of buying an ATM call option & ATM put option
Directional view: Non-Directional
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Unlimited
Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Neutral
Unfavorable Scenario:
a. The asset price remains in a range
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
h. Long Strangle
Long Strangle is the combination of buying an OTM call option & OTM put option
Directional view: Non-Directional
Implied Volatility view: Increase
Max loss: Limited
Max Profit: Unlimited
Greeks impact:
Increase in IV: Positive
Theta Decay: Negative
Delta: Neutral
Unfavorable Scenario:
a. The asset price remains in a range
b. Decrease in Implied Volatility (IV)
Payoff Diagram:
