Chapter 40: Advanced Concepts 847 
Most option strategies fall into one of two categories: as a hedge to a stock or 
futures strategy (for example, buying puts to protect a portfolio of stocks), or as a 
profit venture unto itself. The latter category is where most traders find themselves, 
and they often approach it in a fairly speculative manner - either by buying options 
or by being a premium seller (covered or uncovered). In such strategies, the trader 
is taking a view of the market; he needs certain price action from the underlying 
security in order to profit. Even covered call writing, which is considered to be a con­
servative strategy, is subject to large losses if the underlying stock drops drastically. 
It doesn't have to be that way. Strategies can be devised that will have a chance 
to profit regardless of price changes in the underlying stock, as well as because of 
them. Such strategies are neutral strategies and they always require at least two 
options in the position - a spread, straddle, or some other combination. Often, when 
one constructs a neutral strategy, he is neutral with respect to price changes in the 
underlying security. It is also possible, and often wise, to be neutral with respect to 
the rate of price change of the underlying security, with respect to the volatility of 
the security, or with respect to time decay. This is not to imply that any option spread 
that is neutral will automatically be a money-maker; rather, one looks for an 
opportunity - perhaps an overpriced series of options - and attempts to capture that 
overpricing by constructing a neutral strategy around it. Then, regardless of the 
movement of the underlying stock, the strategist has a chance of making money if the 
overpricing disappears. 
Note that the neutral approach is distinctly different from the speculator's, who, 
upon determining that he has discovered an underpriced call, would merely buy the 
call, hoping for the stock to increase in price. He would not make money if XYZ fell 
in price unless there was a huge expansion in implied volatility - not something to 
count on. The next section of this chapter deals with how one determines his neu­
trality. In effect, if he is not neutral, then he has risk of some sort. The following sec­
tions outline various measures of risk that the strategist can use to establish a new 
position or manage an existing one. 
The most important of these risk measurements is how much market exposure 
the position currently has. This has previously been described as the "delta." Of near­
ly equal importance to the strategist is how much the option strategy will change with 
respect to the rate of change in the price of the underlying security. Also of interest 
are how changes in volatility, in time remaining until expiration, or even in the risk­
free interest rate will affect the position. Once the components of the option position 
are defined, the strategist can then take action to reduce the risk associated with any 
of the factors, should he so desire.