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