Direction Neutral versus Direction
Indifferent
In the world of nonlinear trading, there are two possible nondirectional
views of the underlying asset: direction neutral and direction indifferent.
Direction neutral means the trader believes the stock will not trend either
higher or lower. The trader is neutral in his or her assessment of the future
direction of the asset. Short iron condors, long time spreads, and out-of-the-
money (OTM) credit spreads are examples of direction-neutral strategies.
These strategies generally have deltas close to zero. Because of negative
gamma, movement is the bane of the direction-neutral trade.
Direction indifferent means the trader may desire movement in the
underlying but is indifferent as to whether that movement is up or down.
Some direction-indifferent trades are almost completely insulated from
directional movement, with a focus on interest or dividends instead.
Examples of these types of trades are conversions, reversals, and boxes,
which are described in Chapter 6, as well as dividend plays, which are
described in Chapter 8.
Other direction-indifferent strategies are long option strategies that have
positive gamma. In these trades, the focus is on movement, but the direction
of that movement is irrelevant. These are plays that are bullish on realized
volatility. Yet other direction-indifferent strategies are volatility plays from
the perspective of IV. These are trades in which the trader’s intent is to take
a bullish or bearish position in IV.