Delta Neutral Options Trading Strategy
To understand the Delta Neutral Strategy we need to clearly define Delta.
Delta is nothing but a ratio comparing the change in the price of the underlying asset (eg:cash market price of RIL) to the corresponding change in the price of a derivative (eg:F & O price of RIL).
So in the case of Call Options a delta of 0.8 means that for every Rs.1.00 the underlying stock increases, the call option will increase by Rs.0.80.
In the case of Put Options the Delta will be reversed (negative) because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.8 will decrease by Rs.0.80 for every Rs.1.00 increase in the underlying price.
An in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00.
So what is Delta Neutral Options Trading Strategy?
The term "Delta Neutral" refers to any strategy where the sum of your deltas is equal to zero. So, for instance, if you buy 10 call options, each having a delta of 0.60 and you also buy 20 put options, each having a delta of -0.30 you have the following:
........(10 .x .0.60) .+ .(20 .x .-0.30) .= .6.00 .+ .-6.00 .= .0
Your position delta (total delta) is zero, which means you are delta neutral.
For more info on how to use the Delta Neutral trading strategy with examples read http://content.icicidirect.com/ULFiles/UploadFile_200392312333.asp
To understand the Delta Neutral Strategy we need to clearly define Delta.
Delta is nothing but a ratio comparing the change in the price of the underlying asset (eg:cash market price of RIL) to the corresponding change in the price of a derivative (eg:F & O price of RIL).
So in the case of Call Options a delta of 0.8 means that for every Rs.1.00 the underlying stock increases, the call option will increase by Rs.0.80.
In the case of Put Options the Delta will be reversed (negative) because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.8 will decrease by Rs.0.80 for every Rs.1.00 increase in the underlying price.
An in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00.
So what is Delta Neutral Options Trading Strategy?
The term "Delta Neutral" refers to any strategy where the sum of your deltas is equal to zero. So, for instance, if you buy 10 call options, each having a delta of 0.60 and you also buy 20 put options, each having a delta of -0.30 you have the following:
........(10 .x .0.60) .+ .(20 .x .-0.30) .= .6.00 .+ .-6.00 .= .0
Your position delta (total delta) is zero, which means you are delta neutral.
For more info on how to use the Delta Neutral trading strategy with examples read http://content.icicidirect.com/ULFiles/UploadFile_200392312333.asp