In simple terms, Delta Neutral refers to a style of trading that involves exposure to various positions that combined do not react to small changes in the price of the underlying index or stock. Ideally if this balance is at the optimum level then even if the underlying stock or index moves up or down, the overall position maintains its value and neither increases or decreases in value. This is then a form of hedging.

There are two forms of Delta Neutral Trading, known as Static Delta Hedging and Dynamic Delta Hedging. The Static variety involves setting a position to zero Delta, and then leaving it to unwind on its own. Dynamic Delta Hedging involves constantly monitoring the overall situation and resetting the Delta of the overall positions to zero.

But how can this Neutral positioning make a profit ?

A Delta Neutral Trading Strategy can achieve profits in any of 4 ways as described below:

1.    Via the bid to ask (offer) spread of the option. This is a technique that generally can only be used by market makers, and involves buying at the bid price and simultaneously selling at the ask price, creating a net Delta transaction and profiting from the bid/ask spread with no Directional Risk whatsoever. Also known as Scalping.

2.    Via Time Decay. When a position is Delta Neutral thereby having 0 Delta value, it is unaffected by small movements made by the underlying stock, however it will be affected by time decay as the premium value of the options involved continue to decay. It is possible to set up an options trading positions to take advantage of this time decay and an example of this is known as a short straddle. This profits if the underlying stock remains stagnant or moves up and down but in small amounts.

3.    Via Volatility. By engineering a Delta Neutral position, it is posible to profit from a change in volatility with no directional risk, when the underlying stock moves little. This options based strategy is very useful when implied volatility is expected to change drastically soon.

4.    Via Volatile Option Trading Strategies. Although Delta Neutral positions are not affected by small changes in the underlying stock, they can still profit from much larger moves. One example of this is known as the Long Straddle. This is because a typical Delta Neutral position is still Gamma Positive, which increases position Delta in the direction of the move, allowing the position to profit in either direction.

IN OUR OPINION BASED ON NEARLY 15 YEARS OF EXPERIENCE, TRADING USING A DELTA NEUTRAL STRATEGY VIA OPTIONS CONTRACTS CREATES A FAR BETTER LIKELIHOOD OF SUSTAINED POSITIVE RESULTS.