Use of Delta Neutral Strategy

Use of Delta Neutral Strategy

Submitted by adil on Thu, 04/10/2014 - 08:41

Traders use a number of binary option strategies that are available in the market and implement them while they are trading. These strategies can be very profitable for the traders if they are correctly implemented. Delta neutral strategy is one of the examples of binary options strategies that enable the traders to earn profit without even forecasting or knowing the market trends. In this strategy, the delta of an asset is determined at the rate of change in the price of an asset. For example, if the delta of a call option is 0.50 and the price increases by one unit, then the options price should increase by 0.50. As you can see in the example above that delta was quoted as 0.50, but in a practical world of trading, it is referred to as “50 deltas” by traders and brokers.

In a delta neutral strategy, the word “Delta Neutral” refers to a strategy where the sum of all the details is neutralized and equals to zero. Suppose, a trader purchases 40 call options, each with a delta value of 0.40, and has also purchased 20 put options each with a delta of -0.80. This shows that the sum of the position that traders currently hold in the market is equal to zero, which means that the trader’s delta is also equal to zero. It also indicates that the delta of put options is always negative and delta of call options is always positive. Therefore, when you trade in the market using either a delta of CALL or a delta of PUT, the net profit figure represents the profit of one option and the loss of another.

Characteristics of Delta Neutral Strategy

There are certain attributes of delta that traders come across while they are trading. For example, the delta value increases if the option goes in the money and it decreases if option goes out of the money. It is important to note that call option has a delta of 0.50 and put options has -0.50 delta. The delta of PUT is always negative and signifies that there will always be a downward movement in the put option price if the asset value shows an upward trend. Moreover, put option has a delta close to -1.00 if it is deep in the money and call option has a delta close to +1.00 if it is deep in the money. On the other hand, delta of call and put options move towards zero if it is out of the money.

When a trader does delta trading, he should always prefer to start his position with delta neutral, i.e., the position where the sum of the call and put option is as close to zero as possible.

If the market moves on a level where delta is at least +1.00 or -1.00, or even greater than this, the trader adjusts the delta to bring it back to zero by buying or selling the assets. Therefore, make sure that you are in profit when you make these adjustments. Moreover, always invest in the moving market and do not invest in assets that do not move much.

Delta neutral strategy is used by almost every trading firm because it provides the flexibility to make money even without knowing the market trends. Also, this strategy doesn’t require any fundamental or technical analysis as is required by other strategies. It is a very effective approach in moving market and so, the asset should always be analyzed before implementing this strategy. Although, delta neutral strategy does not focus on the market trends yet in a stagnant market, it does not generate much profit. One of the best things about this strategy is that it puts the trader in a position where he can benefit from the price movement in either direction and can increase his profit.