What is a delta-neutral trading strategy?


Quick Answer

A delta-neutral trading strategy is an options strategy that traders use to create positions that remain relatively unaffected by small movements in the prices of securities. Traders implement the strategy by ensuring that the delta value of their portfolio is as close to zero as possible, according to Options Trading.

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Full Answer

In options trading, the delta value measures the extent to which the value of an option changes in correspondence to a change in the value of the underlying security. Options with a delta value of one decrease or increase in value by $1 for every dollar change in the value of the invested security. The delta value of bids is always positive while that of asks is negative, explains Options Trading. Traders who pursue a delta-neutral trading strategy ensure that the sum of the delta values of their options or stocks is zero or close to zero.

Options traders use a delta-neutral trading strategy to hedge existing positions and to profit from volatility and time decay. Traders who buy an equal number of a stock's call and put contracts profit if the invested security experiences volatility. Writing options through a delta-neutral strategy protects investors from the negative effects of time decay, notes Options Trading. However, if the price of the underlying security moves by a significant degree, the delta value changes and undermines the strategy.

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