3 Tools Traders Use to Trade Market Neutral

By: Wayne Duggan

Predicting a market’s direction over a given time horizon is incredibly difficult. The best traders in the world are right just over 50 percent of the time, and you can imagine what it takes to get those kinds of results.

This is why many traders don’t even try to predict the direction of the market, utilizing instead what’s known as a market-neutral strategy. Here’s a look at what a market-neutral strategy is and some tools that market-neutral traders often use.

What It Means to Be Market-Neutral

The basic idea behind a market-neutral strategy is to eliminate as much broad-market risk from a trade as possible. Market-neutral strategies typically involve hedging or buying one security for the sole purpose of offsetting, or partially offsetting, gains or losses generated by another. Many hedge funds and professional traders apply market-neutral principles to their portfolios specifically for this downside protection.

There are dozens of strategies for investors to use to try to be market neutral. Here are a few of the more popular ways it’s accomplished.


Futures are the holy grail for most market-neutral traders, as they literally offer a way to trade a market’s future direction.

There are futures products for every major market, including currencies and commodities, but the most popular futures contracts are broad equity index futures, specifically the E-mini S&P 500 futures. This tool gives traders the ability to go long or short the entire index nearly 24 hours a day, the idea being that the broad market exposure can serve as a hedge on nearly any trade.

Lightspeed offers active traders the ability to trade futures on specific futures trading platforms, Eze EMS (formerly RealTick) and CQG. Eze EMS (formerly RealTick) has two options based upon the needs of any trader, Eze EMS (formerly RealTick) Pro, and Eze EMS (formerly RealTick) Express. The main difference being that with Eze EMS (formerly RealTick) Express active traders receive four level II screens and the ability to view only 100 symbols at a time. The Eze EMS (formerly RealTick) Express version does not contain the advanced time and sales window or the alarms/alerts on the platform. Choosing a platform is entirely based upon a Trader’s strategy and preference. CQG is built on cloud infrastructure with the ability to trade from your desktop, tablet or mobile device. This platform delivers advanced futures market data, order management, and more.


For those who don’t have access to futures quotes, ETFs can also act as a good trading tool to be market neutral. Large, broad-based ETFs, like the SPDR S&P 500 ETF (SPY) have the same exposure benefits (albeit with a little less liquidity) as S&P futures.

There’s also an entire world of leveraged and inverse ETFs specifically designed for short-term trading. Many traders use these tools as hedges against a day or swing trade in a corresponding market. For example, a long crude oil trade could be hedged by going long an inverse oil ETF or shorting a leveraged oil ETF.

However, these instruments are structurally complicated. You shouldn’t trade a leveraged or inverse ETF without fully understanding how they work and what happens to them over time.


The flexibility offered by options make this another common way to trade market neutral. Because options can provide increased leverage, guaranteed income, and a set expiration date, many traders use them to provide insurance for themselves.

There are entire books describing options hedging strategies, and they can range from the simplest long call option (which could provide a hedge on a short position) or a short put butterfly, which involves buying two puts at a middle strike price, and selling one put against each at lower and upper strikes with the same expiration date.

Trading with Lightspeed

Are you looking to trade futures or options? Lightspeed offers the lowest options commissions and has professional trading platforms based upon your needs and strategy. If you’re not sure which one you prefer, you have the opportunity to take the platform for a test drive with a demo version of the software. To begin trading stocks online with Lightspeed, open an account today.

Lightspeed Financial Services Group LLC is not affiliated with these third-party market commentators/educators or service providers. Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lightspeed Financial Services Group LLC does not endorse, offer nor recommend any of the services or commentary provided by any of the market commentators/educators or service providers and any information used to execute any trading strategies are solely based on the independent analysis of the user.

You may also be interested in...

The IPOX® Week, November 29th, 2021
Read More
The IPOX® Week, November 22nd, 2021
Read More
The IPOX® Week, November 15th, 2021
Read More
The IPOX® Week, November 8th, 2021
Read More

Try the demo

Compare Platforms
Check the background of this firm on FINRA's BrokerCheck

Our website uses cookies to improve the performance of our site, to analyze the traffic to our site, and to personalize your experience of the site. You can control cookies through your browser settings. Please find more information on the cookies used on our site in our Privacy Policy. By clicking OK, you agree to allow us to collect information through cookies.