There are many approaches one can take while trading. One method many traders use is known as delta neutrality. So, what is delta neutrality? Since delta represents a position’s directional risk, delta neutrality refers to a position that is directionally neutral, or doesn’t make or lose any money with small movements in the underlying.
Why would someone want to trade a delta-neutral position or portfolio? There are certain strategies that can profit without picking any direction, such as a short straddle or short strangle. These types of trades rely on the passage of time and changes in volatility to profit as opposed to a directional move. Other uses of employing delta-neutrality are to mitigate directional risk, and to lock in profits or losses.
Before creating a delta-neutral position or portfolio, we have to understand that each delta represents the amount your position or portfolio will gain or lose with changes in the underlying. For example, if you have a position on in AAPL that has a delta value of -80, that position will lose $80 for every 1-point increase in AAPL. Since one share of stock has one delta, we would need to buy 80 shares of stock to create a delta-neutral AAPL position.
On a portfolio level, we first have to convert each position’s individual delta to the same unit. To do this, we beta-weight our portfolio deltas to SPY, which adjusts each of our position’s to reflect their directional exposure to movements in SPY. After beta-weighting, we can use shares of SPY to hedge our entire portfolio. For example, if after beta-weighting to SPY we find our portfolio has an overall delta of 125, we could short 125 shares of SPY to achieve delta neutrality. This would protect us from any losses due to small movements in SPY.
When it comes to futures, all futures have a different delta value per contract. /ES has a delta of 50 per contract, and /NQ has a delta value of 20 per contract. For example, to hedge positions in /ES and /NQ, we would have to keep in mind each contract’s respective delta value to achieve delta-neutrality.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.