How to Make Money with Non-Directional Strategies

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What are Non-Directional Strategies?

Non-Directional Strategies are neutral strategies that are not based on the direction the market moves.

Whether markets move up or move down, these strategies will generate profits.

They are the complete opposite of Directional Strategies.

Directional Strategies assume that the market moves in only one direction.

They generate profits only if the price moves in the predicted direction and a loss if the price moves in the opposite direction.

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Non-directional strategies, therefore, come as a solution to streamline the pitfalls of directional strategies.

They acknowledge the fact that markets are not one-sided thus giving options for when an asset takes a different direction from what you predict.

Can you really make money trading Non-directional strategies?

Well, in this post, I will show you how to do exactly that.

How to make money with non-directional strategies.

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  1. Trading the Straddle.

A straddle is a neutral trading strategy. It involves buying both Call and Put options simultaneously, at the same strike price, and with the same expiry time.

You will profit if the price rises or falls from the strike price by an amount exceeding the total premium paid.

This means, such a market needs to be very volatile for the price to move that significantly.

How do you determine the total premium to be paid for the saddle?

By adding the cost of the put and the call alternative. If each costs $5, then the cost of setting up such a saddle is $10.

Where the strike price is $60, then the price must trade outside the $50 to $70 range for you to make some profit.

Trading the Straddle.

If it trades within the range, then you will lose some money.

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On the same note, if the price, at expiration, rises to $75, then the call will be worth $15 while the put will be worth zero.

On the flip side, if the price at expiration falls to $45, the put will be worth $15 while the call will be worth zero.

In either case, you earn $5 more and that is profitability.

If the price at expiration falls to $55, then the put will be worth $5 while the call will be worth zero.

On the contrary, if the price at expiration rises to $65, then the call is worth $5 while the put is worth zero.

In either case, there will be a net loss of $5 which is not much of a loss.

  1. Trading the Strangle.

A strangle is a fixed time trade trading strategy.

It involves holding Call and Put options simultaneously, with the same expiry time but at different strike prices.

It is a common strategy if you know that the price of an asset will move significantly but are unsure which direction it will take.

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The strategy becomes profitable only where the price swings sharply in any direction.

In a long strangle, the call option’s strike price is higher than the current market price.

Conversely, the put option’s strike price is lower than the current market price.

A short strangle is similar to a short straddle.

It is a neutral strategy just like it is in the straddle.

Here, you profit if the price rises or falls from the strike price by an amount exceeding the total premium paid.

Trading the Strangle.

For example, let us say that the strike price is $60.

You enter a call alternative at $65 and the cost is $5 and a put option at $55 at a cost of $4.5.

If at expiration, the price is still between the range of $55 and $65, then you lose everything – $9.5.

If at expiration, the price is at $45, the put is worth ($10 less $4.5) while the call alternative loses $5.

You realize that put earned you $5.5 while the call alternative lost $5.

The net effect is a profit of $0.5 and if you had bought 1,000 units, that makes $500 for you.

  1. Trading the Butterfly Spread.

The Butterfly spread is another FTT strategy used on non-directional trading.

It involves entering four fixed time trade contracts with the same expiration time but three different strike prices.

These strike prices are the higher, the at-the-money, and the lower strike prices.

The higher and the lower strike prices are the same distance from the at-the-money strike price.

3.1 Long call butterfly is created by:

  • Buying 1 in-the-money call contract with a low strike price.
  • Selling 2 at-the-money call contract.
  • Buying 1 out-of-the-money call option with a higher strike price.

Maximum profit – a strike of the sold contract less (strike of the lower call, premiums, and commissions).

Maximum loss – premiums plus commissions.

3.2 Short call butterfly is created by:

  • Selling 1 in-the-money call contract with a low strike price.
  • Buying 2 at-the-money call contracts.
  • Selling 1 out-of-the-money call contract with a higher strike price.

Maximum profit – initial premium received less commissions.

Maximum loss – strike price of the bought call less (lower strike price and premiums received).

3.3 Long put butterfly is created by:

  • Buying 1 put with a low strike price.
  • Selling 2 at-the-money put contracts.
  • Buying 1 put with a higher strike price.

Maximum profit – higher strike price less (strike price of sold put and premiums paid).

Maximum loss – premiums plus commissions.

3.4 Short put butterfly is created by:

  • Selling 1 out-of-the-money put option with a low strike price.
  • Buying 2 at-the-money put contracts.
  • Selling 1 in-the-money put contracts at a higher strike price.

Maximum profit – premiums received.

Maximum loss – higher strike price less (strike price of the bought put and premiums received).

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3.5 Iron Butterfly is created by:

  • Buying 1 out-of-the-money put contract with a low strike price.
  • Selling 1 at-the-money put contract.
  • Selling 1 at-the-money call contract.
  • Buying 1 out-of-the-money call contract with a higher strike price.

Maximum profits – premiums received.

Maximum loss – strike price of the bought call less (strike price of the sold call and premiums received).

3.6 Reverse Iron Butterfly.

This is created by:

  • Selling 1 out-of-the-money put at a low strike price.
  • Buying 1 at-the-money put contract.
  • Buying 1 at-the-money call contract.
  • Selling 1 out-of-the-money call contract at a higher strike price.

Maximum profit – strike prices of all sold call contracts less (strike price of the bought call options and premiums paid).

Conclusion.

Been wondering how to make money without focusing on the direction of the market?

This post gives just enough non-directional strategies you can use to make money trading on the asset market.

Apply them accordingly to make consistent profits.


*Risk warning:

The information provided does not constitute a recommendation to carry out transactions. When using this information, you are solely responsible for your decisions and assume all risks associated with the financial result of such transactions.
 

Start Trading 

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