Neutral strategies profit when the stock doesn't move much. They're short gamma and long theta: you're paid to accept the risk of a big move.
Short strangle and straddle (undefined risk)
- Short straddle: sell the ATM call and ATM put. Max gain at the strike; losses grow without limit in either direction.
- Short strangle: sell an OTM call and an OTM put. A wider profit zone and less premium; still undefined risk.
- These need a margin account and strict management. Most traders prefer the defined-risk versions below.
Iron condor = bull put spread + bear call spread, same expiration
- Max gain = total credit. Max loss = wider wing width − credit. Breakevens = short put − credit and short call + credit.
- Example. The stock is at $100, 35 days out. Sell the $95/$90 put spread and the $105/$110 call spread for $1.80 total. Max gain $180, max loss $320 ($5 − $1.80), breakevens $93.20 and $106.80.
- Only one side can lose at expiration, so the broker holds one wing's risk as margin.
Placing the strikes
- Many traders sell the short strikes around 0.15–0.20 delta, or just outside the expected move, 30–45 days out.
- Credit vs width: collecting about one-third of the width is a common target. At $1.80 on $5 wings, you risk $3.20 to make $1.80.
- Wider short strikes win more often but pay less. There's no free lunch: probability and payoff trade off.
Managing condors
- Take profits at about 50% of max gain.
- When a short strike is tested, choose one: close the whole trade; roll the untested side closer for extra credit; or roll the whole condor out in time for a credit.
- Close by about 21 days to expiration to step away from rising gamma.
- Avoid holding through earnings or other binary events inside the expiration.
Butterfly: buy 1 lower strike, sell 2 middle, buy 1 higher (equal widths, same type)
- A cheap debit with a large payoff if the stock pins the middle strike at expiration.
- Example. Buy the $95 call at $6.50, sell two $100 calls at $3.40, buy the $105 call at $1.30. Debit $1.00. Max gain $4.00 ($5 width − $1) at exactly $100; max loss $1.00 outside $95–$105. Breakevens $96 and $104.
- Iron butterfly: sell the ATM straddle and buy OTM wings. It's a credit trade with the same shape.
- Broken-wing butterfly: uneven widths, so one side carries no risk. Used to lean directionally.
When neutral strategies fit
- High IV rank (rich premium), no scheduled catalyst before expiration, and a clear range on the chart.
- Avoid when the market is in a strong trend or VIX is rising fast.
Key takeaways
- Condors: defined-risk range trades. Credit is max gain; width − credit is max loss.
- Butterflies: cheap bets on a specific price at expiration.
- Manage early: 50% profit, defend tested sides, exit before 21 days and before events.