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Non-Directional Option Trades
03/20/2014 9:12 am EST
Though many traders focus on buying calls or puts expecting a large move in one direction or another, Kerry Given discusses several non-directional option strategies.
SPEAKER: I'm here with Kerry Given, author of No-Hype Options Trading. You mentioned a term to me earlier that fascinated me: Non-directional options trading. Can you tell me more about that?
KERRY: Sure. The basic idea is that I'm going to trade what the market does today. In other words, I'm not going to predict what it's going to do tomorrow, and it really takes a lot of pressure off you, because predicting is very difficult.
SPEAKER: Describe the difference for me between someone who takes a directional strategy versus a non-directional strategy.
KERRY: In the options world, there are several what we call delta-neutral strategies, and virtually any one of those could be used non-directionally, and what you would do is you'd put on the trade, and you would have certain rules that basically each day you would approach the market, and you'd say, "Well, if it moves here, I'm going to do this. If it moves there, I'll do that. If it stays in between, I'll do nothing," and so you're reacting to what the market gives you today and not trying to say what it's going to do tomorrow.
SPEAKER: What kind of trades does a non-directional options trader put on?
KERRY: I'd say the most common ones are butterflies at the money or iron condors. That's a very common one. Double diagonals are less common, but those are also non-directional.
SPEAKER: What's a double diagonal?
KERRY: Well, that's where you basically sell your two options. Think about an iron condor, where you sell a call up above the price of the index and sell a put down low, and then buy a put to hedge that and buy a call to hedge the other side. Well, if you buy your long put and long call out in the next month, then you have a diagonal spread on each side.
SPEAKER: This diagonal, does that refer to the chart? I mean, where do these terms come from?
KERRY: It actually goes back—when the Chicago Board Options Exchange opened in 1972, they had the prices on the board on the wall, and each column was an expiration month, and each row was a strike price, and so if you were trading two options in the same column, it was a vertical spread. If you were trading diagonally across, two different expirations and two different strikes, you had a diagonal spread.
SPEAKER: There's some options trivia. That's awesome. Thank you, Kerry.
KERRY: You're welcome.
SPEAKER: You're watching the Money Show video network.
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