The Best Non-Directional Options Strategy in the Markets

Many of the trading strategies I have shown you have been Directional Trades. That means the option position requires the underlying stock or ETF to make a particular move in price – either up or down – for the trade to work.

And that’s exactly what makes directional trades so challenging – trying to predict which way a potential trade will go is difficult. You can plan your trades carefully, follow your rules to the letter, and still the markets can intervene, turning a perfectly good prediction about a stock’s direction into a losing trade.

What’s more, indecision about a stock’s direction – and whether you want to buy calls or puts – can delay your trade, causing you to miss out on your predicted move.

How would you like a strategy that allows you to place a trade that doesn’t CARE which way it moves, just so long as it moves?

That’s just what I’m going to show you today…

Profit No Matter Which Way a Stock Moves

Non-Directional Traders don’t need to worry about making predictions based on complex market data, pages and pages of stock charts, or anything else. Non-Directional Traders make trades to benefit no matter which direction a stock moves… so long as it moves.

How? You might think you need to take two separate trades, one a long call and the other a long put.

That’s almost correct…

The Straddle is a non-directional trading strategy that incorporates buying a call option and a put option on the same stock with the same strike and the same expiration.

A Straddle allows you to have a bearish and bullish play on a stock at the same time, with each acting as a hedge or insurance against the other.

So long as the underlying stock moves up or down in a big enough price move to cover the cost of the trade.

Just Move!

How do you counter or prevent getting into a trade where the stock doesn’t move?  You want to take an option trade on a stock that has what’s called a catalyst for a move coming up in the near future.

A catalyst is a reason. There has to be a reason for traders to make a decision to either buy the stock or sell the stock and do so in a fashion that causes the price to move higher or lower.

What types of events or announcements can a stock make that causes a big move one way or the other?

  • A pending FDA approval for a new drug
  • The hiring or firing of their CEO
  • An upcoming earnings report
  • The launch of a new product

Now, I should point out that the cost of a Straddle is considerably more than a straight bearish or bullish options play – because instead of just buying one option, you are buying two. Since cost is risk, the straddle trade has an increased price risk over the directional option trade because of this.

But your odds of making money are greater.

Look at it this way…

The underlying stock can do one of three things: Move up, move down, or move sideways. So with a directional options trade, you have a 1 in 3 chance of the trade working in your favor.

But with a non-directional trade, you have a 2 in 3 chance of making money because you can profit if the stock moves up OR down.

Of course, if the stock stays stagnant, both Theta, (time value) and intrinsic value will come out of both options, and losses happen rather quickly.

Let me show you a quick example…

Example: AAPL

As an example, let’s take a look at Apple Inc. (NASDAQ:AAPL). We’re going to use the company’s next earnings, due on October 27, as our catalyst. And whether it is before market open or after market close, I want to be out of the Straddle by close of market October 26 (I’ll show you why in a moment).

My option analysis tools can tell me a great deal of information on about behavior of stocks before and after their earnings over the last four earnings reports.

AAPL has beaten the actual estimate eight out of the last eight earnings. See below:

My option analysis tools also tell me what AAPL has done by way of a percentage price move prior to the last four earnings. See below:

It shows an increase in price on four of the last four earnings. The percentage shown is for the four days prior to the earnings report (which is why we want to be out by October 26, before the earnings hit).

The next graphic will show you the price move percentage after the earnings announcement for those same four earnings reports. See below:

As you can see, the move in AAPL had a 50/50 split between positive and negative price moves. This graphic represents the move of the stock from before the earnings and the day of (if Before Market Open – BMO) or the day after (if After Market Close – AMC).

Even though AAPL has beat their earnings expectations eight out of the last eight times, you can see that didn’t always mean the stock was going to go higher the day following its earnings announcement. That could be for a variety of reasons – perhaps they beat earnings, but missed on revenues, or revised projections downward for the next quarter, or both.

The thing to know is that a positive beat doesn’t guarantee a positive post-earnings move… and that’s perfectly fine for the Non-Directional Trader – any move is a potentially profitable one.

The goal of this opportunity is to get a run up or down in the stock prior to the earnings and get out the day before. In other words, we’re playing the run up before earnings rather than the earnings themselves.

Now let’s look at the options chain:

The straddle is constructed with a call and a put with the same expiration and the same at-the-money strike price (it may end up that the strikes are slightly in or out of the money as it is rare the stock price is exactly the same as the strikes).

The current price on AAPL is roughly $112.29, so the closest strike is the $112 call and put.

Click to Enlarge

Here is where the cost of the straddle can be an issue – at $8.25 on a per-contract basis, the Straddle is significantly more expensive than just buying the call or the put. But just as with our “loophole trades,” even though you are buying both it is still considered a single transaction by your broker (which means you’re only charged a single commission).

Now, the challenge of this trade is that AAPL needs to make a move prior to expiration of $8.23 to break even. That may seem like a daunting challenge, but if you look at your charts on AAPL, you will see that 8.23+ point price moves have indeed happened, and have done so in a month’s time.

Now, this may not be a strategy where you are looking for a 100% return. You may have to settle for a 50% ROI. Set a profit target goal and also be willing to take what profit you can based on what your trade plan dictates.

Here’s your trading lesson summary:

The Straddle is a non-directional trading strategy that can profit no matter which way a stock moves… so long as it moves.
  1. Find a stock with an upcoming catalyst – any reason for it to move up or down.
  2. Buy an at-the-money call and an at-the-money put with the same strike price and expiration.
  3. This strategy may limit your returns, and 100% isn’t always possible because of the low-risk nature of the trade. So be sure to set your profit targets and stick with them.

Good trading,


23 Responses to “The Best Non-Directional Options Strategy in the Markets”

  1. Would you ever consider a bull call and bear put spread instead of a straddle to lower the cost of entry. The sold call and put would be placed above/below the range of the expected move. I know there are more commissions but I think that would be more than made up by the lower entry cost.

  2. “The best non-directional trading strategy in the markets?” You must be kidding. Cost per contract = $825,
    Max potential loss on trade at exit at market close on earnings date = -$468. 50% return =$412 at approx. stock price of 123.40 ( a move of 11.4 points). Reward/risk at 50% return = .88 (less than 1:1). Probability of profit greater than zero = 32%. Probability of profit of 50% or greater approx. = 22%. Summary = 22% probability of return greater than 0.88:1 reward/risk, and 68% probability of loss.

  3. Hi Tom, I presently have a level 2 account and can’t trade spreads yet (moving to change that). I have been using your recommendations for loophole trades to make straight purchase of calls or puts, with varying results. I have done well on NKE, PCLN and even made a little on FDX and GG before getting out of them (scary). Lost big on SU (80%) and present PCLN isn’t looking so good with the option prices reset due to change in Earnings Report date. I see the value of the loophole trade in cutting losses, although not certain that you can’t still lose 50% + or – ~33% (just a guess) if the trade goes badly against stock movement direction (still better than what I am doing now, but can you confirm any thoughts on that?). I am moving to change my account to do spreads, but I have a question on that. Can you identify (not recommend) any options trading platforms or brokers that provide such a platform for home traders so that I can submit the trade myself without having to call a broker? I find your system, very very interesting (and at this time, still rewarding), but definitely need the full options trading account. Thanks for all your help – you are an excellent teacher.

  4. Thanks again for all the comments on my recent article… here are my responses to your questions:

    Joe, absolutely you can do this, but not just to get in and out ahead of earnings. What your referring to is called a “Short Butterfly” and typically this is a move to maturity. The article I wrote above shows a move up to earnings, which is a pure volatility play. Good thinking though!

    Paul, if there is a move in one direction prior to your exit date, and one side is actually more profitable than the entire cost of the straddle, it makes sense to “lock in” your profit and hold the other leg of the straddle. Good point!

    Julie, that’s exactly why… but if you want to hold through earnings, your trading more on movement and less on volatility.

    Steve, you bring up an interesting point, as well as how to use an options calculator, but please re-read the article and pay special attention to “Get out before earnings” part. The probability you speak of is based on holding options through expiration and based off of a total random experience. Nowhere in the article did I mention to buy and hold until expiration. This is a special pattern on only SOME optionable stocks, and of these, they each have their own “Optimal” window. Believe me, I have traded for over half my life, and I wouldn’t teach you something unless I had the experience and knew what I was talking about.

    Rick – Assuming that you bought a straddle a week before Apples July earnings announcement and got out a day before the announcement, the straddle went from $537 to $819 or a 52.5% profit, and that was before the earnings announcement. If you would have waited until after earnings, you would have seen the profits cut in half. Don’t take my word for it, check the option prices out on the July w4 126 straddles on July 14th and again on July 20th.

    Thanks again everyone for the comments!

  5. Don, Robin, thanks for the comments… I actually find my system very very interesting as well! Seriously though, I get your point about the levels. I would love to be a call or put only trader, but again volatility dictates what strategy I want to take, and I won’t lead subscribers somewhere that is risky (Like that PCLN reset for instance) Though I might add, with todays price action, I think that those options are close to where they opened at last Monday.

    A note on losses… every trade I offer, if not managed properly can suffer 100% losses, but no more. First, that means that anything I offer wont have UNLIMITED risk. All risks are clearly defined. But lets get back to that 100% part.

    100% of what? $10,000 (100 shares of stock at 100) or $500 (an example of 1 call option) or $250 (an example loophole trade). To a degree, they are all equal by having either 100 shares of stock, or the right to own 100 shares of stock for a limited time. An experienced option trader knows this and will use leverage to their benefit He knows that it might cost $10,000 to take a stock position, but instead will leverage the position, while keeping the majority of his cash for use in other opportunities.

    FINALLY – this is NOT a recommendation, I am not remunerated by brokerage referrals, and I would ask that you consult as many brokers as possible before deciding on one. That being said, over the last several years teaching hundreds of thousands of students, the three brokers that keep being mentioned seem to be optionsXpress, Think or Swim (TD Ameritrade) and Interactive Brokers. They each have their own strengths and weaknesses… For instance, I hear that OX has the easiest web platform to use, TOS has the most complete platform, while IB seems to offer the best in execution and fills. Too bad all 3 of these guys cant merge together huh!

    Thanks again, look for a follow up article on this subject on Thursday.

  6. Robin, try Zacks. Answer the questions as Tom recommends. Did so and first pop was 100% on IBM…thanks Tom. Zacks has a higher security requirement than other brokers, be patient to get on board. Worth it and their option trading board is friendly.

  7. I am mew to your publication and in this article I am n not sure of the meaning of column 5 and 6 of your chart. More specifically I don’t know the meaning of AED and BED. I assume it means After earnings date and Before earnings date. Moreover I Assume the % under column 5 is the percentage move before the earnings but I don’t know what the numbers under column 6 represent. Can you explain.


  8. Tom, could you explain what I did wrong here? I did a straddle with PCLN on a weekly option expiring today (Oct 23) as such:
    OCT4 15 1365 CALL +1 15.10 15.10 1.625 ($1,347.50)
    OCT4 15 1365 PUT +1 7.50 7.50 0.225 ($727.50)
    As you can see, both the CALL and the PUT lost money. Thankfully this was a paper trade so no real money was lost. However, this could be a great learning opportunity for both myself and many other readers as to what NOT to do when doing these straddles. What did I do wrong? Thank you!

  9. Joseph lorenzo

    Tom love your basic explanations for option plays. Not new to option but enjoy the way you simplify. Nice. ! a little worried on money calendar see market reversing and heading down not in agreement with your calendar . hope I’m wrong

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