Non-directional strategies, also known as neutral strategies, are ones which do not rely on the trader knowing whether the price of the underlying asset is going to rise or fall. Instead, the success of the strategy actually depends on how volatile the price is. This is a significantly different method of operating on the markets in comparison with the major trading strategies.

There are many different strategies used by those that prefer to follow a non-directional method, and here are some of the most well-known.

Butterfly

The butterfly is a strategy known for limiting risk. The idea is that there is a good chance of a modest profit if the future volatility of the asset is lower than the implied volatility. Typically, a butterfly would consist of the following positions:

· A single long call that has a strike price of x+a

· Two short calls that have a strike price of x

All options have the same expiration.

The butterfly can also be shorted, in which case a profit will be turned if the future volatility is actually higher than the implied volatility. In this case, the short calls would be long, and vice versa.

Straddle

A long straddle is another popular strategy because of its limitation of risk. Profits are virtually unlimited, but maximum losses are only the cost of taking out the two options, which are:

· A single long call that has a strike price of x

· A single long put that has a strike price of x

Both positions have the same expiration.

A short straddle is a very risky method, because maximum losses are theoretically unlimited, but the maximum profits are only what can be gained on the sale of the two options. The process is simply the reverse of a long straddle; a put and call of the same strike price and expiration are shorted.

Strangle

The strangle strategy is very similar to the straddle, but instead of the two positions having the same strike price, they each have a different one. Strangles can be less risky than a straddle if the strike prices chosen are out-of-the-money.

A long strangle is beneficial for high volatility, where the short is more effective where minimal volatility is likely.

Collar

The collar is favoured because it limits both losses and profits. In some ways it is considered the opposite of a straddle.

The strategy is as follows:

· A long position in the underlying asset itself

· A long put option with a strike price of x

· A short call option with a strike price of x

Both options have the same expiration date.

Risk Reversal

A risk reversal strategy is the same as a collar, but the trader does not hold the underlying asset.

Fence

The Fence strategy is another method of limiting the range of returns and losses. It consists of:

· A long position in the underlying asset itself

· A long put with a strike price of or close to the current price of the asset

· A short put with a strike price lower than the long position

· A short call with a strike price above the current price of the asset

The above strategies are the ones most frequently used by those new to non-directional trading, though there are more advanced methods, such as the iron butterfly, iron condor and jade lizard.