Delta Neutral

A Delta Neutral portfolio strategy will utilize several different positions as a way of balancing out positive and negative deltas in a way that the overall delta of the two will offset (meaning, it will equal zero).

Delta, one of “the Greeks”, is a measurement of how much the price of an option changes when the price of its underlying security changes as well.

As that value changes, the position of the Greeks will also shift (to either positive, negative, or neutral).

Consequently, investors who strategize in order to achieve delta neutrality will adjust accordingly.

Maintaining a delta neutral portfolio comes with the task for recalculating Greeks and rebalancing undertaken positions on a daily or weekly basis.

Profiting from a Delta Neutral Strategy

The followers of the delta neutral strategy playbook will profit from the time decay on options or implied volatility.

Delta neutral hedging

Delta hedging is a complex process in which traders keep the delta of their portfolio as close to zero as they possibly can.

It is accomplished by either buying or selling an amount of the underlying security which matches the delta of the portfolio. The same can be achieved with options as long put options’ delta will range from -1 to 0 and long calls will go from 0 to 1.

Delta Neutral in theory

The first iteration of the delta neutral portfolio was shown on the mathematical proof of the Black-Scholes model, a model known to be the first of its kind to produce correct prices for some classes of options.