Market-neutral strategies aim to make a profit as time passes due to time decay (Theta). However, it's not just about starting a position and waiting for profits to grow. There's always a chance of a sudden price change in the stock or index that could erase the profits.
These strategies are effective when markets trade within a small price range. What's great about these flexible option strategies is that they can be used by bullish, bearish, or neutral traders to potentially earn profits.
ABCD is currently priced at ₹65 per share. Expecting a rally towards ₹70 as the Dec. 18 options expiration date nears, you decide to buy an out-of-the-money calendar spread.
Normally, traders use the calendar strategy if they think the stock price will remain close to ₹65 at expiration. However, it can also be used by those anticipating a different stock price at expiration. One advantage of using the out-of-the-money calendar spread is that it's cheaper than an at-the-money spread.
Example:
As time goes by and the stock approaches the ₹70 per share mark, your position becomes more profitable. The maximum profit occurs if the stock is very close to ₹70 by December 18. At that point, or even earlier if you decide, you can close the position by selling the calendar spread.
If the stock price doesn't align with your predictions, the spread loses value as the December calls expire without value. You can choose to hold onto your January calls, hoping for a positive turn, but it's often a good idea to sell the call to recover some of the spread's cost.
Higher implied volatility leads to larger profits than expected, while lower implied volatility results in reduced profits.
Similarly to adjusting the strike price of a calendar spread based on your market view, you can do the same with an iron condor.
For instance, if you believe the market will go down in the short term, you can create an iron condor as a strategy to benefit from that outlook. Here's an example using an imaginary index trading at 1,598.
Example;
Rather than setting the iron condor around the current index price of about 1,600, you might choose to position it around 1,520 to match your bearish viewpoint.
Due to the negative market outlook, consider selling calls that are already in the money, as shown in this example. If this option bothers you, you can opt for different strike prices. However, the premium for this iron condor tends to be higher since the call segment should be priced above ₹5. This setup limits the potential loss if your bearish forecast happens to be incorrect.
Some suggest executing all four parts of an Iron Condor simultaneously. But, if you truly expect a market decline, you might sell the call spread now and plan to sell a put spread later. Be cautious though: If the market unexpectedly rises, you might not get the chance to sell the put spread, resulting in a higher loss compared to selling a put spread and collecting additional premium.
Sure, here's a revised version:
"Imagine you're feeling positive about a stock, like ABCD, which is currently trading around ₹65 per share. Instead of purchasing an at-the-money butterfly strategy, you might choose to buy one where the middle strike price is above the market if you're bullish, or below if you're bearish. This approach is a low-cost method to align with your market outlook."
