Writing Neutral Options Spreads
by Scott Silver
Most investment advisors, stockbrokers and the like give their clients investment advice such as "Buy
IBM stock, the market's going up," or "There's a glut of oil on the market, sell Exxon," etc., etc.
Investment advisors for pension plans and portfolio managers of large institution accounts trade the
market by buying and selling stock market indexes, futures and options. These are group mixtures of
stocks ranging from 50 to over 1,000 stocks. All of these people- investors, advisors, brokers, etc., have
one thing in common: They want the market to move in their direction.
A neutral option writer is a different type of investor. In fact, he does not care in which direction the
market goes as long as his accounts (books) are balanced. He sells overvalued calls (rights to buy) and
overvalued puts (rights to sell) of a stock or commodity, and then during the life of that option, continues
to keep his "books" balanced so that wherever the issue expires, he collects all of the option premium.
This neutral option strategy is called a strangle.
In October 1984, the Gold market traded in a narrow range, David L. Caplan sold puts of February 1985
Gold at 320 and calls of February 1985 Gold at 380. To do this he put up only $700 in margin, to insure
that he would pay for any losses though the commodity exchange, and collected a $700 premium. Caplan
authors a newsletter Opportunities in Options and heads up the Commodities and Options Department of
Jesup & Lamont Securities Co., Inc. in Los Angeles.