There are market conditions that call for what are known as directional strategies. In a bull market you can buy stock or choose from a variety of bullish options strategies. In a bear market you can sell stock short or choose a decidedly bearish options strategy. But what can you do if you think the market as a whole, or a particular stock, will go nowhere over a period of time, and buying or selling shares won't result in much profit? You might consider one of a range of neutral options strategies.
Choose your objective
Calls and puts are flexible financial products, and can be put together into a variety of strategies that reflect many financial objectives. In a neutral market you might:
- Speculate that a stock will remain stuck in neutral and profit from this lack of momentum.
- Decide that generating income from an existing, sluggish stock position suits your needs and expectations.
- Have unrealized profits from a previous stock purchase and decide to position your shares for an up or down move with one simple strategy.
Whatever path you take, you'll want to make sure the options strategy has the potential to meet your expectations and objectives before jumping into the marketplace.
For simplicity's sake, calculations of profit
or loss do not include the impact of commissions, transaction
fees, or taxes. You should discuss these with your brokerage firm
before making a transaction. You should also discuss the tax consequences of these strategies with a tax adviser.
Similarly, the discussions that follow
assume the use of regular calls and puts - that is, contracts
whose terms have not been adjusted due to an underlying stock
split or any corporate action such as a special dividend, spin-off,
merger, or acquisition. The examples also assume that all contracts
in the course represent 100 unadjusted shares with a strike and
premium multiplier of 100.