Delta Neutral Trading

Remember that delta means speed.  The greater the leverage of your position, the greater potential exposure to speed.  For example, if you buy a call option, the underlying stock may increase by 10% while your call option may increase by 100%.  This leverage is great when it's in your favour, but not so good when it's against you.  Taking the same example, if you buy a call and the underlying stock decreases by 10%, your call options may decrease in value by near 100%.  This risk needs to be hedged.  The term "hedge" is associated with the process of reducing risk. 

Delta neutral trading is a vast topic in itself, which will be covered in Special Article sessions within this site.  It is a method of trading whereby your position delta on the totality of your spread trade is one where the sum of the deltas equals zero.  The idea is that this conveys a "hedged" position, whereby the risk is reduced.

Delta neutral traders do this on the basis that they can continually make profitable adjustments to their trade as the asset price fluctuates.  The adjustments (usually selling part of the profitable side) bring the spread trade back to a delta neutral position (ie where the sum of the deltas for that position equals zero), while also capitalising on profitable side of the trade.

A popular technique is to make the profitable adjustments back to delta neutral when the underlying asset has moved by 20% in either direction.

Remember that delta neutral does NOT mean risk free!  Deltas are NOT linear.