Delta neutral is a portfolio strategy where the overall delta equals zero. This means your position does not gain or lose value based on small moves in the underlying stock. Here is how it works.
What is Delta?
Delta measures how much an option's price changes for every $1 move in the stock. A delta of 0.50 means the option gains $0.50 when the stock goes up $1.
- Calls: Delta ranges from 0 to 1.00
- Puts: Delta ranges from -1.00 to 0
- Stock: Delta is always 1.00 per share
Simple version: Delta neutral means your position does not care which direction the stock moves (for small moves). You are not betting on direction - you are betting on other factors like time decay or volatility.
How to Create a Delta Neutral Position
To be delta neutral, your total position delta must equal zero. You combine positive delta and negative delta positions to offset each other.
Example: Delta Neutral Straddle
Stock is at $100.
- Buy 1 ATM call (delta = +0.50)
- Buy 1 ATM put (delta = -0.50)
- Total delta = +0.50 + (-0.50) = 0
This straddle is delta neutral at entry. You profit from movement in either direction, not from a specific direction.
Example: Delta Hedging Stock
You own 100 shares of stock (delta = +100).
- Buy 2 ATM puts (delta = -0.50 each = -100 total)
- Total delta = +100 + (-100) = 0
Your position is now hedged against small moves in the stock.
Why Trade Delta Neutral?
- Profit from volatility: Make money when the stock moves big, regardless of direction
- Profit from time decay: Sell options and collect theta without directional risk
- Reduce risk: Hedge existing positions against market moves
- Trade IV: Bet on implied volatility changes without directional exposure
Delta Neutral Strategies
Straddles and Strangles
Long straddles are approximately delta neutral at entry. You profit if the stock moves big in either direction.
Iron Condors and Iron Butterflies
These credit strategies are delta neutral. You profit from time decay and the stock staying in a range.
Delta Hedging
Continuously adjust your position to maintain delta neutrality as the stock moves. Market makers do this constantly.
The Catch: Gamma
Delta neutral only works for small moves. As the stock moves, delta changes. This change is measured by gamma.
- High gamma: Delta changes quickly, needs frequent rebalancing
- Low gamma: Delta is more stable
A position that is delta neutral at $100 may not be delta neutral at $105. This is why delta hedging requires active management.
When Delta Neutral Fails
- Big sudden moves (gaps) can cause losses before you rebalance
- Transaction costs from frequent hedging eat into profits
- Theta decay works against long delta neutral positions
- Changes in IV can still affect your position
Track Your Portfolio Delta
Pro Trader Dashboard shows your overall portfolio delta. Understand your directional exposure at a glance.
Summary
Delta neutral means your position has zero net delta - it does not gain or lose from small stock moves. You create delta neutral positions by combining positive and negative delta. This lets you trade volatility, time decay, or IV without betting on direction. Remember that delta changes as the stock moves, so you may need to rebalance.
Learn more: options greeks and straddles.