Delta Neutral Trading

| April 10, 2012 | 0 Comments

neutral market positionA delta neutral position is when two or more positions are used to establish a neutral market position. 

A trader can apply a delta neutral position with stock and one or more options, OR two or more different options.  Whatever combination of securities used, the delta of the two securities offset each other so the position has no price risk. 

In other words, no matter where the price of a stock goes, a delta-neutral position is theoretically un-exposed to market risk.

However, practical application of a delta-neutral position reveals the position is only delta neutral for an extremely short time after the trade is established.

Once a stock moves in any direction, the implied volatility and deltas of the option change and the position is no longer delta neutral.   In other words, a truly delta-neutral position only exists in theory.

In order for a position to remain delta neutral, either the stock would have to not move a penny or the position would have to be constantly adjusted.

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Category: Options Trading Strategies

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.