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OPTIONS TRADING
MODULE 3: ADVANCED NEUTRAL STRATEGIES
LEARNING NOTES FOR MODULE 3

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 Long Call Condor Strategy – Explanation
Profit • The long condor strategy should be employed where a
+25
stock is expected to trade in a range
• Choose a stock that appears bound in a range avoiding
Breakeven

0 news or earnings announcements

• The stock should be used on a one month time frame
• Time decay is helpful when profitable and harmful when
-25
0 50
Loss Asset Value the position is losing money

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 Long Call Condor Strategy – Pros & Cons
Profit • Can profit from a stock that is neither trending up nor
+25
down for little cost
• Risk is limited
Breakeven

0 • Relatively high risk / reward ratio

• Highest profit potential is in a narrow range and at
expiration
-25
0 50
Loss Asset Value • Need good bid ask spread in the options

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 Steps to Trade the Long Call Condor Strategy
Profit • Identify a stock that is trading in a range with no news
+25
announcements imminent
• Purchase one ITM call, sell one nearer ITM strike call, sell
Breakeven

0 one OTM strike call, purchase one further OTM strike call
• Position can be exited at one time, or the legs of the
position may be traded as the stock trades in the range
-25
0 50
Loss Asset Value • Position is a low cost debit trade

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 Example – Buy PFE JAN $42 Call $2.70, Sell JAN $43 Call $1.90,
Sell JAN $44 Call $1.20, Buy JAN $45 Call $.65
Profit Trade Scenario
+25 Net Debit Premiums bought – premiums sold
$2.70 + $.65 - $1.90 - $1.20 = $.25
Maximum Risk Net debit
Breakeven

$.25
0
Maximum Reward Difference in adjacent strikes – net debit
$1 - $.25 = $.75
Breakeven at Expiration Lower strike + net debit
Down $42 + $.25 = $42.25
-25
0 50 Up
Loss Asset Value Higher strike – net debit
$45 - $.25 = $44.75
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 Long Put Condor Strategy – Explanation
Profit • The long put condor strategy should be employed where
+25
a stock is expected to trade in a range
• Choose a stock that appears bound in a range avoiding
Breakeven

0 news or earnings announcements

• The strategy should be used on a one month time frame
• Time decay is helpful when profitable and harmful when
-25
0 50
Loss Asset Value the position is losing money

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 Long Put Condor Strategy – Pros & Cons
Profit • Can profit from a stock that is neither trending up nor
+25
down for little cost
• Risk is limited
Breakeven

0 • Relatively high risk / reward ratio

• Highest profit potential is in a narrow range and at
expiration
-25
0 50
Loss Asset Value • Need good bid ask spread in the options

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 Steps to Trade the Long Put Condor Strategy
Profit • Identify a stock that is trading in a range with no news
+25
announcements imminent
• Purchase one ITM put, sell one nearer ITM strike put, sell
Breakeven

0 one OTM strike put, purchase one further OTM strike put
• Position can be exited at one time, or the legs of the
position may be traded as the stock trades in the range
-25
0 50
Loss Asset Value • Position is a low cost debit trade

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 Example – Buy SJM JAN $100 Put $1.10, Sell JAN $105 Put $2.05,
Sell JAN $110 Put $3.70, Buy JAN $115 Put $6.20
Profit Trade Scenario
+25 Net Debit Premiums bought – premiums sold
$6.20 + $1.10 - $3.70 - $2.05 = $1.55
Maximum Risk Net debit
Breakeven

$1.55
0
Maximum Reward Difference in adjacent strikes – net debit
$5 - $1.55 = $3.45
Breakeven at Expiration Lower strike + net debit
Down $100 + $1.55 = $101.55
-25
0 50 Up
Loss Asset Value Higher strike – net debit
$115 - $1.55 = $113.45
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 Short Straddle Strategy – Explanation
Profit • The short straddle strategy should be employed where a
+25
stock is expected to trade in a range
• Choose a stock that appears bound in a range avoiding
Breakeven

0 news or earnings announcements

• The stock should be used on a one month time frame
• This is a high risk strategy which you will rarely use but
-25
0 50
Loss Asset Value you should understand the mechanics

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 Short Straddle Strategy – Pros & Cons
Profit • Can profit from a stock that is neither trending up nor
+25
down with a credit trade
• Relatively high short term yield
Breakeven

0 • Risk is uncapped, and reward is capped

• High probability of exercise at expiration
• Need good bid ask spread in the options
-25
0 50
Loss Asset Value

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 Steps to Trade the Short Straddle Strategy
Profit • Identify a stock that is trading in a range with no news
+25
announcements imminent
• Sell one ATM put and one ATM call
Breakeven

0 • Position can be exited at one time, or the legs of the

position may be traded as the stock trades in the range
• Position results in a credit trade
-25
0 50
Loss Asset Value

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 Example – Sell USO Dec $12 Call $.65, Sell Dec $12 Put $.55
Profit Trade Scenario
+25 Net Credit Premiums sold
$0.65 + $0.55 = $1.20
Maximum Risk Uncapped
Breakeven

0 Maximum Reward Net credit

$1.20
Breakeven at Expiration Strike – net credit
Down $12 + $1.20 = $10.80
-25 Up
0 50
Loss Asset Value Strike + net credit
$12 - $1.20 = $13.20

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 Short Strangle Strategy – Explanation
Profit • The short strangle strategy should be employed where a
+25
stock is expected to trade in a range
• Choose a stock that appears bound in a range avoiding
Breakeven

0 news or earnings announcements

• The strategy should be used on a one month time frame
• This is a high risk strategy, but slightly more viable than
-25
0 50
Loss Asset Value the short straddle

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 Short Strangle Strategy – Pros & Cons
Profit • Can profit from a stock that is neither trending up nor
+25
down with a credit trade
• Relatively high short term yield
Breakeven

0 • Risk is uncapped, and reward is capped

• High probability of exercise at expiration
• Need good bid ask spread in the options
-25
0 50
Loss Asset Value

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 Steps to Trade the Short Strangle Strategy
Profit • Identify a stock that is trading in a range with no news
+25
announcements imminent
• Sell one OTM put and one OTM call
Breakeven

0 • Position can be exited at one time, or the legs of the

position may be traded as the stock trades in the range
• Position results in a credit trade
-25
0 50
Loss Asset Value

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 Short Strangle Strategy – Sell DUK DEC $90 Call $1.00, Sell
DEC $85 Put $.95
Profit Trade Scenario
+25 Net Credit Premiums sold
$1.00 + $.95 = $1.95
Maximum Risk Uncapped
Breakeven

0 Maximum Reward Net credit

$1.95
Breakeven at Expiration Lower strike – net credit
Down $85 - $1.95 = $83.05
-25 Up
0 50
Loss Asset Value Higher strike + net credit
$90 + $1.95 = $91.95

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THANK YOU FOR READING!

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