Up until this point we've only discussed directional strategies. If we think the market will go up, we can sell a put, buy a call spread, buy shares of stock... we have a number of bullish weapons in our arsenal. On the flip-side, if we are bearish, we have several strategies we can rely on to profit from an underlying's declining value. The problem is, we may not always have a directional opinion. The product might be completely new to us, there may be uncertainty about a future event, or we might simply be terrible at picking direction. Whatever the reason, neutral strategies are a useful tool for playing the game without the need for directional bias.
The Benefits
By combining both bullish and bearish legs into one position we can establish a price range in which we profit regardless of which direction the share price moves. As long as the share price doesn't decline too sharply or rise too much, we can make money. We can also collect significantly larger credits allowing us to more effectively take greater advantage of and contraction, as well as actively defend losing positions. Neutral strategies can help us bring balance to our portfolios, and allow us to our risk on an entirely new level.
The Risks
Just like everything else in the trading world, every benefit comes with a risk. All the strategies we've discussed so far have had only 1 break-even either above or below the current share price. Neutral strategies, on the other hand, have risk in BOTH directions giving them at least two break-evens – one above and one below the current share price. It's up to us to decide how far away we want to set our b/e's on either side. The tighter we make them, the larger credit we will receive, but the lower our odds of profit. The wider we make them, the higher our odds of profit, but the smaller our profit potential will be. Over the next several articles I'll create risk profiles that detail exactly how these strategies can be established.