Overview

The non-directional trading strategies template allow users to determine the profit when buying options. This template focuses on non-directional strategies which bet on the volatility of the market to create profit. These strategies usually include a combination of call and put options. The profit of the strategies depends on the spot price and the cost of the option premiums.

This template includes the following strategies :

 

Overview of Non-directional Trading Strategies

Non-directional trading strategies are bets that the volatility of the underlying asset. If an investor believes the price of the underlying asset will be very volatile, then they will create a straddle or strangle strategy. If they believe there will be low volatility, then they will create a butterfly spread using either call or put options.

Butterfly spread using calls

Investors use a butterfly spread when they think there will be little volatility with the price. Butterfly spread using calls are made with a bull call spread and a bear call spread. The bull call has strike prices of K1 and K2 and the bear call has strike prices of K2 and K3. This is also the same as buying a call with K1, a call with K3, and selling two calls with a strike price of K2.

Butterfly spread using puts

Butterfly spread using puts is also a bet on low volatility of the price. This trading strategy is made with a bull put spread and bear put spread. The bull put spread has strike prices of K1 and K2 and the bear put spread has strike prices of K2 and K3. This is also the same as buying a put with K1, a put with K2 and selling two puts with a strike price of K2.

Straddle

Investors use the straddle strategy when they believe the price of the underlying asset will be volatile. This is made with a call and put option with the same strike price. If premiums are not considered,  then investors will receive a profit if the spot price is either bigger or smaller than the strike price.

Strangle

A strangle strategy is similar to a straddle as both rely on the volatility of the market. It is also made with the purchase of a call and put option. However, a strangle cost less than a straddle. This is because the put option has a lower strike price and the call option has a higher strike price.

Why does it matter?

Non-directional trading strategies template help investors limit their risk, decrease costs, and predict the cash flow with greater accuracy. These strategies also allow investors to make investment decisions based on their market prediction.

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