Market Neutral Strategies Lesson

In this lesson, you’ll discover how to profit from market movements in both directions using market neutral strategies. Unlike directional strategies that rely on price increases or decreases, these approaches allow you to benefit from volatility or price movements within a defined range.

We’ll start with the long strangle, which involves buying an out of the money call and an out of the money put with the same expiration date. This strategy helps keep premium costs down while positioning you to profit from strong movements in either direction. The long straddle works similarly but uses at the money options with the same strike and expiration, requiring higher premiums but offering similar profit potential from increased volatility. Both strategies are ideal around macro events like central bank interest rate decisions or quarterly earnings releases that can drive up volatility.

The Iron Condor takes a different approach by profiting from decreased volatility and the passage of time. This strategy involves buying and selling two calls and two puts with four strike prices and the same expiration date. You sell options with strikes closer to the spot price to collect premium, then buy options with strikes further away to protect against losses. The maximum profit occurs when the underlying price stays within the range of your sold strikes, making this a credit strategy with defined risk and return.

For the long strangle and straddle, you’ll want to see a bearish jax, bearish cumulative jax, bullish vex, price below the ivor level, and bullish vega. For Iron Condor setups, look for positive jacks, bullish Net Jacks, bearish VAX, and the market in positive gamma. You can use the one day expected move for 0DTE options or daily Iron Condor trades, along with the Net JAX chart to identify stickier strikes with more gamma.

We provide specific guidance on using the Q models to select your strike prices: for strangles, use the call resistance level as the long call strike and the high volume level or put support level as the long put strike. For straddles, use the ivor level for both strikes. For Iron Condors, use the first core resistance as the short call strike, second core resistance as the long call strike, put support as the short put strike, and second put support as the long put strike.

Video Chapters

00:00 – Introduction to market neutral strategies
01:23 – Long strangle strategy explained
03:40 – Long straddle strategy breakdown
05:08 – Iron Condor strategy and setup
07:30 – Using indicators and Q models for Iron Condor
08:29 – Strategy checklist and next steps

Key Takeaways

Long strangles and long straddles profit from high volatility and strong price movements in either direction, ideal for trading around macro events
The Iron Condor is a credit strategy with defined risk that profits when the underlying stays within a price range and volatility decreases
Use the Net JAX chart to identify stickier strikes with high gamma and the one day expected move for 0DTE or daily Iron Condor setups
Apply Q models including call resistance, put support, core resistance, and ivor level to select optimal strike prices for each strategy

Video Transcription

[00:00:00.24] - Speaker 1
We have looked in the previous lessons at directional strategies that will benefit in the increase or decrease of the price of the underlying. Then we have the neutral strategies. These types of strategies allow us to benefit from movements of the underlying in both directions or from the movements of the underlying within a price range. Here we have the most important market neutral strategies. Let's start from the long strangle.

[00:00:21.31] - Speaker 1
It's a strategy that consists in buying an out of the money call and an out of the money put with the same expiration. The short strangle, which consists on selling an out of the money call and an out of the money put with the same expiration. We then have the long straddle. This consists of buying a call and a put with the same strike and expiration. And the short straddle which is selling a call and a put with the same strike and expiration.

[00:00:43.31] - Speaker 1
Then we have the Iron condor, which is a strategy that consists of buying and selling two calls and two puts with the same expiration date. In this strategy we have four strike prices. This strategy profits from low volatility. And if the price of the underlying stock stays within the range, you then have the reverse iron condor. This strategy consists of selling a call option and a put option with a strike price lower than the one of the underlying security.

[00:01:06.05] - Speaker 1
And then buying a call option and a put option with higher strike prices. And finally the iron butterfly and the reverse butterfly. We start by talking about two strategies that are similar, the long strangle and the long straddle. Let's start with the long strangle. The long strangle is one of a series of advanced option strategies.

[00:01:23.33] - Speaker 1
These are non directional strategies where the trader does not know which way the price will go. The trader can make money if the price moves in both directions. The long strangle consists in buying an out of the money call and an out of the money put with the same expiration date. This strategy seeks to take advantage of an increased volatility of the underlying stock. The options that we purchase are bought out of the money.

[00:01:45.54] - Speaker 1
This helps us keep the cost of the premium down. We need a strong movement of the underlying stocks to make this strategy profitable. Many traders use this strategy close to macro event or catalyst. For example, the release of central bank statements such as interest rate decisions or the release of quarterly earnings of companies can be events that drive up the volatility of the underlying. The strategy requires the trader to pay two premiums, the long call and the long put.

[00:02:09.49] - Speaker 1
It can lead to greater losses if the underlying does not move and the volatility does not increase. Lets look at the payoff of the long strangle. In this example, the spot price is $50. We buy a $55 strike call and a $45 strike put at the cost of $5. Our maximum loss is $500 or $5 times 100 shares, which is the sum of the two premiums that we paid.

[00:02:31.52] - Speaker 1
The profit potential for the strategy is unlimited. In this case, the breakeven prices are represented by the strike prices plus or minus the cost of the premium which is $5. The underlying must move at least $5 to one side or the other for the strategy to start seeing profits before expiration. If the price of the underlying is below $40 at expiration, the trader gains on the put side. If the price of the underlying is above $60 at expiration, the trader gains on the call side.

[00:02:59.25] - Speaker 1
Long strangles require high volatility to be profitable. We need the price to move in either direction. But we need a strong move time in this case has a negative effect for the strategy. Now let's look at the checklist. We want to see a bearish jax, a bearish cumulative jax, a bullish vex price below the ivor level and a bullish vega.

[00:03:19.09] - Speaker 1
Now let's look how to use the Q models. We can use the call resistance level as the long call strike and the high volume level or put support level as the long put strike. Now let's look at the long straddle. The long straddle consists of buying a call option and a put option with the same strike and the same expiration. The strategy takes advantage of the increased volatility of the underlying asset.

[00:03:40.26] - Speaker 1
The strategy is similar to the strangle but we use at the money options instead of out of the money option. This strategy needs a strong movement of the underlying to bring profit before expiration. Also in this case, the strategy requires the trader to pay two premiums, the long call and the long put. It is riskier than the strangle as the premium we pay for the add the money options is higher. Let's look at the payoff of the long straddle.

[00:04:02.59] - Speaker 1
In this example, the spot price is $50. We buy a $50 strike call and a $50 strike put for a cost of $10. Our maximum loss is $1,000, which is $10, times 100 shares, which is the sum of the 2 premium that we paid. The profit potential is unlimited. The breakeven prices are represented by the strike plus minus the cost of the premium which is $10.

[00:04:24.16] - Speaker 1
The underlying must move at least $10 in either direction for the strategy to start making money before expiration. If the price of the underlying is below $40 at expiration, the trader gains on the put side. If the price of the underlying is above $60 at expiration, the trader gains on the call side. Long straddles also require high volatility to be profitable. We need the price to move in either direction and we need a strong move.

[00:04:48.19] - Speaker 1
Time has a negative effect for the strategy. Let's look at the checklist. We want to see a bearish Jax, a bearish cumulative neck checks, a bullish wax price below the eyeball level and a bullish Vega. And finally, the setup using the Q models. In this case, we can use the eyeball level as the level for the long call and the long put strikes.

[00:05:08.17] - Speaker 1
At this point, we move to the iron condor. This strategy is very interesting because it can be used when you have tools that follow price ranges. The iron condor strategy aims to generate returns for a decrease in volatility and the passage of time. It's a strategy that allows us to define our risk and potential return. It reaches the maximum profit if the price of the underlying remains within the strikes and the structure expires out of the money at expiration.

[00:05:32.26] - Speaker 1
The strategy consists of buying and selling two calls and two puts with the same expiration date. In this case, we have four strike prices. Let's take for example a stock that is trading at $50. We can create an iron condor like this. Long put with a strike at $40, short put with a strike at $45 short, short call with a strike at $55 and long call with a strike at $60.

[00:05:55.26] - Speaker 1
The idea of this strategy is to sell two options with strikes closer to the spot price to collect the premium and buy two options with strikes further away to protect against losses. It is a credit strategy as we collect premium which is represented by the difference between the two. Premium collected for the sale of the option and those paid for the purchase of the options. The trader has the flexibility to choose the distance of the strike prices from the spot. And based on the distance, they will have a different risk and reward profile.

[00:06:22.11] - Speaker 1
The wider the spread between the strikes of the short and long positions, the higher the premium collected. Let's look at an example of a payoff of the iron condor. In this example, the spot price is $50 and we place four trades. We sell a put with a strike of 45 and we buy a put with a strike of 40. On the other side, we sell a call with a strike of 55 and we buy a call with a strike of 60.

[00:06:44.01] - Speaker 1
Let's suppose that our net credit or the difference between the premiums received and the Premiums paid is $2. We have a defined risk and return. The maximum return is represented by the credit received, in this case $200 or $2 times 100 shares. The breakeven prices are calculated by adding and subtracting the credit received from the short strikes. In this example, $43 and $57 or $2 below the strike of the sold put and $2 above the strike of the sold call.

[00:07:12.50] - Speaker 1
The maximum loss is $300 or the difference between the breakeven prices and the strikes of the purchase option. In this strategy we are short options. If the implied volatility goes down, this will have a positive impact. The premium will tend to decrease and this is good for the seller. The theta factor is positive for this strategy.

[00:07:30.52] - Speaker 1
We have showed you how to read patterns in earlier sections of the course. We can use additional indicators. In the case of Iron Condor, our goal is to achieve the maximum profit where the price should remain within the range. If you are trading 0DTE options or Daily Iron Condor, you can use the one day expected move. We provide this daily in our report.

[00:07:50.13] - Speaker 1
It is a volatility indicator and not a directional indicator. In addition, you can use the Net JAX chart. Here you can see all the stickier strikes. Sticky strikes are those with more gamma and therefore can be used as strikes for our spreads. In the case of the Iron Condor, we want high gamma in the strikes we sell and we want to see an increase in gamma on the top of the screen.

[00:08:11.20] - Speaker 1
This is generally positive because it means that the market is more bullish. When the market is bullish, the volatility tends to go down. Finally, our checklist. We want to see positive Jacks bullish, Net Jacks, Bearish VAX and market in positive Gamma. Finally, how can we use the Q models to set up an Iron Condor?

[00:08:29.19] - Speaker 1
We can use the first core resistance as the short call strike, the second core resistance as the long call strike, the put support as the short put strike and the second put support as the long put strike. We are at the end of the lesson. Let's look at hedging strategies next.