What is Delta Neutral Strategy?

Trading
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I would like to know what Delta Neutral Strategy.
Is it applicable to all multi-leg strategies or selected, what are they?
How to identity the Delta Neutral Stikes?
Is it possible to get matching Deltra Neutral legs always?
Please clarify with the relevance of Delta Neutral for Short Straddle & Short Strangle.

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As instructed, logged in with the registered account details

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Hi @5LB5SW -
A delta neutral strategy is where delta is zero or close to zero for all combined legs. For reference:

  • A long stock will have a delta of 1
  • A long call will have a positive delta ranging from 0 to 1 where the ATM will be ~0.50. Deep OTM will be near 0 and deep ITM will be near 1.
  • A long put will have a negative delta ranging from -1 to 0 where the ATM will be ~-0.50. Deep OTM will be near 0 and deep ITM will be near -1.
  • A short call will have a negative delta ranging from -1 to 0.
  • A short put will have a positive delta ranging from 0 to 1.

Institutional option traders will focus on delta and gamma to manage their short exposure. For example, if an institutional trader wants to sell a call but not expose themselves to the underlying price risk, they would buy stock in the appropriate ratio. This ratio is the delta. If the trader sells 20 ATM calls with a delta of -0.50, they would buy 10 of the underlying leading to a delta of 0 or delta neutral. Movement in the price of the underlying will impact the delta of the position and in order to maintain delta neutrality, the trader would need to buy/sell the appropriate amount of the underlying or calls.

In practicality, maintaining delta neutrality can be expensive and even institutional traders donā€™t perfectly manage delta.

A short straddle will naturally be close to delta neutral when you enter the position. For a strangle, it will also be relatively close to delta neutral if you use equi-distant strikes. You can determine this by looking at the delta values in the option chain. In the case of a straddle, look at the ATM call delta value (should be around 0.50) and look at the ATM put delta value (should be around -0.50). The sum of those will be close to 0 +/- 0.05 or so.

You shouldnā€™t necessarily be worried about managing to delta but rather managing to the price of the underlying for a short straddle/strangle. Hope this helps!

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Thanks for the explanation to plan for a good trade.

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