What is Delta Neutral?

In the financial field, if an investment portfolio is composed of related financial products and its value is not affected by small price changes in the underlying asset, such a portfolio has a delta-neutral nature. The components of this investment portfolio usually include options and the corresponding underlying assets, allowing delta to cancel out positive and negative, making the price of the investment portfolio relatively insensitive to the price of the underlying assets.

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The delta value measures the change in the option price caused by changes in the underlying asset price when other parameters are unchanged.

From a mathematical perspective, delta represents the first derivative of the fair price of an option against the price of the underlying asset.

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Delta is a function of S, and it is also

Investors can buy or sell a certain amount of underlying assets to establish the positions required for delta hedging . This number is determined by the delta of the portfolio. By adjusting this number, the total delta of the portfolio is zero, that is, the goal of delta neutrality is reached.

An option market maker (or other market participant) can also use the relevant option to establish a delta hedging position. The delta of the portfolio is equal to the sum of the deltas of the constituent options. This method can be used when the subject matter itself is difficult to trade. For example, some objects may be difficult to borrow or short.

For example, a delta-neutral strategy could be to buy a deep-in-the-money call option while selling a deep-in-the-money put option. The delta for deep call options is 1 and the delta for deep call options is -1. In this way, within a certain floating range of the underlying asset price, their deltas offset each other. ^[1]