Options strategy that profits from outperformance (or underperformance) relative to a stock index

Question

If I expect a stock to go down, I could buy put options. Conversely, if I expect a stock to go up, I could buy call options.
If I expect a stock to underperform the market (but not necessarily go down), what options strategy can I use? Similarly, if I expect a stock to outperform the market (but not necessarily go up), what options strategy can I use?
Example 1: If I expect a stock to underperform the market:

If the market rises by 10% while the stock rises less than 10%, I should profit.
If the market falls by 10% while the stock falls more than 10%, I should profit.
Otherwise, there should be a loss.

Example 2: If I expect a stock to outperform the market:

If the market rises by 10% while the stock rises more than 10%, I should profit.
If the market falls by 10% while the stock falls less than 10%, I should profit.
Otherwise, there should be a loss.

Is there any options strategy that can profit depending on whether I think a stock will outperform or underperform relative to a stock index?

Bob Baerker · Answer

In general, you have three bets that you can make with options,  The stock goes up, the stock goes down or it goes nowhere. There are basic strategies for this as well as well as more nuanced variations of these three strategies.  When you involve two underlyings, it gets more complicated.
The cleanest approach is a pairs strategy with the two underlyings.  Short the overvalued security and buy  the undervalued one.  Under/over value has two meanings.  It can be based on  a valuation of fundamentals or it could simply be an expectation of reversion to the mean.
Yes, I understand that it's not what you asked about.  I only mention it because it's cleaner (no time decay, disparate implied volatilities as well as no issues with significant change in implied volatility.  However, this strategy is best left to those who know how to manage such positions.
This idea segues to going long a call on one security and going long a put on the other one, a pseudo long straddle/strangle. The problem with this is double sided time decay, at it's worst if there's lack of movement, along with the IV issues.  And if each security goes in the wrong direction, both sides lose, whether it's an underlying pair or an option pair.
I've done a lot of pairs with equities but they were always in the same sector such as gold stocks.  The reason being that if gold makes a big move, both are likely to move up or down together and success is based more on whether the expected reversion to the mean plays out.

Options strategy that profits from outperformance (or underperformance) relative to a stock index

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