Use Option Spread Trading to Profit from Neutral Markets

I have explained several main advantages of option spread trading in a couple of previous articles. (here and here). Some of those advantages are the ability to control a large security or a contract with only a small amount of money and reduction of risk.

Another option spread trading advantage is that traders are almost invisible to the market. If I decide to go long and buy a lot of calls on Alphabet, Inc. or copper futures, my trades, and trades of other traders, are aggregated and reported. Other investors can see in which direction the market is moving and adjust their own trading accordingly. Therefore, large volume of calls or puts can have a significant impact on the direction of the overall market. However, through options spread trade I can go both long and short in the same market and not affect the direction of that market.

To make a profit with basic option calls or puts, the market needs to move. Another amazing advantage of option spread trading is that I can now take positions in markets where I am not sure of the direction of the underlying security. In most examples of option trades, the price of the underlying stock or commodity had to go up or down to make a profit.

Unlike selling and buying basic calls and puts, I am no longer too concerned about how quickly my orders get filled slippage when I engage in option spread trading. Slippage can be quite severe in some markets. Some markets might have very low volume. Other markets might lack enough buyers or sellers to clear the market.

However, with spread trading I am not concerned about the exact price at which I enter each trade because these are hedged with my other side of the spread trade. The other assumption is that both sides of the trade may incur similar levels of slippage, balancing each other out.