Profiting With Delta Neutral Positions by Stan Freifeld
Trading delta neutral positions is a strategy that is used by professional and nonprofessional traders to produce profits with reduced risk. The idea is to remove the directional component from the position so that profits can be made whether the underlying moves up or down. Here’s how to construct delta neutral positions.
It’s not easy to make money trading, but when trading equities, at least the concept is clear: buy low and sell high, or sell high and buy low. When trading options, you have more alternatives using spreads. It is not unreasonable to buy an option that you expect will lose value and will result in a loss while simultaneously selling an option that you think will lose even more value and will result in a gain. The combination of the gain and loss will yield a net profit on the spread. Oftentimes, an option trader will determine that he can’t accurately predict which way a stock will move and so will want to take the directional risk out of the equation. Employing this strategy is often referred to as delta neutral (DN) trading...