Delta Neutral Hedging

What is Delta Neutral Hedging?

In finance, delta neutral refers to a portfolio of related financial assets whose value remains unaffected while the underlying security's value fluctuates somewhat.

Delta hedging can isolate volatility changes for an options trader by reducing directional risk.

Example of Delta Neutral Hedging:

To find the delta hedge quantity, you multiply the absolute value of the delta by the number of option contracts by the multiplier. In this case, the quantity is 300, or equal to (0.20 x 15 x 100). Therefore, you must sell this amount of the underlying asset to be delta neutral.

Why is Delta Hedging important?

For a given range of market movements, a delta-neutral portfolio evens out the response to market movements, bringing the net change of the position to zero. Options traders employ delta-neutral methods to profit on implied volatility or options time decay. Hedging can also be done with delta-neutral techniques.