Delta Neutral Portfolios - The Options Greeks - Options Trading Tutorial

What is a Delta Neutral Portfolio?
Delta neutral portfolios are portfolios of options and the underlying instrument with multiple positions with balancing positive and negative deltas so that the overall delta of the portfolio sums to zero.

Delta measures how much an option's price changes when the underlying security's price changes.

As the value of the underlying assets changes, the position of the Greeks will shift between being positive, negative and neutral. Investors who want to maintain delta neutrality must adjust their portfolio holdings accordingly. Options traders use delta neutral strategies to profit either from implied volatility or from time decay of the options. Delta neutral strategies are also used for hedging purposes.

A related term, delta hedging is the process of setting or keeping the delta of a portfolio as close to zero as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re-hedged too frequently.

Delta hedging may be accomplished by buying or selling an amount of the underlying that corresponds to the delta of the portfolio. By adjusting the amount bought or sold on new positions, the portfolio delta can be made to sum to zero, and the portfolio is then delta neutral.

Options market makers, or others, may form a delta neutral portfolio using related options instead of the underlying. The portfolio's delta (assuming the same underlying) is then the sum of all the individual options' deltas. This method can also be used when the underlying is difficult to trade, for instance when an underlying stock is hard to borrow and therefore cannot be sold short.

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[ravisubbu]

So, how does one make money in a Delta neutral strategy if it is constructed in such a manner that market swings do not change the value of the portfolio?

[marcgerges]

Your demistifying the world of trading one Greek font at a time, , , thanks