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neutral strategies

The Power of Neutrality

The advantages and risks of trading within price ranges

Helpful Comparisons

Let's take a look at how neutral strategies differ from bearish and bullish strategies. In the
charts below you can see hypothetical scenarios in which a neutral strategy is compared to
and
The dashed red lines represent the upper and lower break-evens of the neutral strategy. The dashed blue line represents the original share price (which is the break-even point for both long and short shares).

1. Slight Rise in Share Price

Figure 1
In this scenario, the share price hovered up and down for a while, briefly breached the break-even, and landed slightly higher than it started. Both long shares and the neutral strategy would have made profit, while the short shares would have lost money.

2. Slight Decline in Share Price

Figure 2
In this scenario, the share price landed slightly lower in the end. Since it landed within range, both short shares and the neutral strategy would have ended up profitable, while the long shares would have lost money.

3. No Change in Share Price

Figure 3
This time, the share price stayed within range for the entirety of the cycle and landed exactly where it started. Both the long and short shares would have been a
while the neutral strategy would be profitable.

4. Large Rise in Share Price

Figure 4
The share price skyrocketed almost immediately in this scenario. In the end, the long shares would have profited greatly while the neutral strategy and short shares would have been losers.

5. Large Decline in Share Price

Figure 5
In this final scenario, the price action was extremely volatile and finally landed significantly lower than the original share price. As a result, the short shares would have made good money while the other two strategies would have been losers.

Thoughts

There is no strategy that will win every time. However, as you can see from the examples, neutral strategies made money in three out of five possible scenarios. They can fail under extreme price fluctuation, but perform well in range-bound markets. These examples are simplifications but give you a general idea of why neutral strategies are such useful tools.

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neutral strategies
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