About delta neutral trading

                                                                                         

Future option spreads can be traded in many ways. One of these ways is to buy and sell them based on their deltas. A part of these deltas are called 'delta neutral trades'. Delta neutral trading means trading using option trades in which the total delta of all of them is zero.

An important thing about delta neutral trading is having the ability to use deltas to control risks, and in the same time being in a position from which you can draw profits. There are some other things that must be remembered when using the delta neutral trading :
-an at-the-money option has the delta of 0.5
-the delta value of a long future is 1.0 and of a short future -1.0
-selling an at-the-money put will give you a delta of 0.5, and buying one a delta of -0.5
-the values of deltas are changing as a function - the further any of the options runs out of money the more its delta value gets closer to zero.

Technically, where you want the market to go determines the deltas. The simplest example of delta neutral trading is buying both an at-the-money call and an at-the-money put - the sum of the delta values of each is zero. Another example of delta neutral trading is buying a long future and selling two calls with the delta of 0.5 each - -2 x 0.5 + 1 = 0.

A different method of delta neutral trading is the ratio back spread - selling an option at-the-money and buying a larger number of options that sum exactly the amount you earned from selling the first option. This method should be appealed to only in the far months, because this way you get more time. Some say that this advantage of time isn't worth giving up so much. Also, there is a too big difference between between the option you sell and the option you buy. So, this way of delta neutral trading is quite unstable.

Remember to be carefull when using delta neutral trading however because the market keeps shifting in one direction or another, and the point is to make your delta value increase profitably.

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