Definition
Delta-Neutral Strategy
A delta-neutral strategy balances long and short deltas so the position has little directional exposure, profiting from time or volatility instead.
By combining options and the underlying so their deltas sum to roughly zero, a trader removes the directional bias and bets instead on theta decay or volatility changes. A short straddle, for example, starts delta-neutral and earns from time decay if the underlying stays put.
Maintaining neutrality requires re-hedging as gamma shifts the delta when price moves — a constant task near NSE weekly expiry. Indian option sellers use delta-neutral setups on Nifty and Bank Nifty to harvest premium, adjusting with futures or extra options when the position drifts directional.
Related terms
- DeltaDelta measures how much an option's premium changes for a ₹1 move in the underlying stock or index.
- GammaGamma measures how fast an option's delta changes as the underlying moves — the rate of change of delta.
- Short StraddleA short straddle sells a call and a put at the same strike to profit when the underlying stays calm and range-bound.
- Hedge RatioThe hedge ratio is the proportion of a position that must be offset to neutralise risk, often equal to the option's delta.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.