A Delta Neutral Strategy aims to eliminate directional price risk in a derivatives portfolio by offsetting long positions with short positions. The goal is to ensure that the portfolio’s overall value remains stable regardless of minor movements in the underlying asset’s price. Achieving a delta neutral position requires careful calculation of the delta of all positions and balancing them.
Adjustment
Delta hedging involves constantly adjusting the portfolio to maintain a delta value of zero as the underlying asset price changes. For example, a trader might sell or buy shares of the underlying asset to counteract the delta changes of their options positions. This continuous rebalancing can be resource-intensive, particularly in highly volatile markets.
Risk
While eliminating directional risk, a delta neutral strategy introduces other risks, primarily gamma risk and volatility risk. Gamma measures how quickly delta changes with price, requiring frequent adjustments to maintain neutrality. Volatility risk, specifically Vega risk, exposes the portfolio to losses if implied volatility changes unexpectedly, impacting the options’ extrinsic value.
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