How to Trade Options Neutral Strategies - The concept of Delta

From Zero to Options - The Secrets of Options Strategies is a series of tutorial having the purpose to give you an in-depth in the fascinating world of options. Here, you will be presented all the most rewarding strategies it is possible to make trading stock options.

Each strategy is explained step by step giving you all the necessary elements and skills to make you independent on trading. Furthermore, for each strategy you will find a useful section explaining how to trade using the ThinkorSwim Trading Platform.

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How to place the most rewarding options strategies from scratch? Visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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Delta neutral option strategies are considered as those in which the direction of the trade is not important. This happens because it is possible to make a profit whether the stock moves up or down. Delta neutral traders must be able to find the optimal relationship among strikes, implied volatility and the effect of time. Their goal is to create positions with the highest probability to get a profit regardless of the market direction. Traders can achieve such result by planning and assessing in advance their reactions to market moves.

There are different types of delta neutral strategies:

• Straddles (Long and Short);
• Strangles (Long and Short);
• Synthetics.

Here, you will find all the information you need to get your own way with long straddles. More delta neutral strategies will be introduced and fully explained in following releases.

At this stage, there are two main truths in the Stock Market you must be aware of:

1. Stocks fluctuate all the time;
2. Time moves always on.

Accepting these two truths can help you to choose options strategies that fit your trading style the best and manage them in order to minimize the risk involved.

Free Tutorials - Stocks, Options, ThinkorSwim and more.. Click Here!

To create an overall neutral position (delta 0), it is necessary deeply understand what delta is and how it is calculated for stocks and options.

Delta Mechanics - Stocks, Options, Futures

Delta is a measure of how much the price of an option will change given a $1 change in the underlying stock. It is essential to know that stocks and futures have always delta equal to 1 if you are a buyer and -1 if you are a seller. As a consequence, when you buy 100 stocks or one futures contract, you are +100 deltas; when you sell 100 stocks or one futures contract, you are -100 deltas. Deltas are a little more complicated for options than they are for stocks and futures. For options it is always a number between -1 and +1. Options long positions can only have positive delta, which is a number between 0 and +1, whilst options short positions can only have a negative delta, a number between -1 and 0.

The closer is the delta of options to 1 or -1; the highest will be the connection with the respective underlying security and, consequently, the impact of the stock movement on the option price.

For further information, see the free trading tutorial Stock Options Greeks - The Delta, How To Trade Puts and Calls with Direction.

The delta depends on the kind of options traded (calls or puts), the chosen strikes and the relationship with the price of the underlying stock. In other words, the delta of options is strictly related to the fact that options might be ATM (at-the-money), ITM (in-the-money) or OTM (out-of-the-money). Such classification of options is known as option’s moneyness.

For further information, see the free trading tutorial Options ITM, ATM, OTM and the Intrinsic Value.

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Do not forget to visit my website at www.FromZeroToOptions.com to get tutorials, instructions, articles and much more stocks and options related.

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Setting up a Delta Neutral Trade

Let us try to create a delta neutral strategy. If you buy 100 stocks, you will have +100 deltas. As your purpose is to get a delta 0 position, you need to find financial instruments which carry -100 deltas. You can decide to buy two ATM put options or to short two ATM call options. As each option contract gives the right to control 100 shares, you will have roughly -100 deltas and your position will be balanced.

In analytics terms:

Buy 100 stocks +100 deltas

Buy 2 ATM puts (-0.50*2)*100= -100 deltas

In a long straddle, you buy the same number of contracts of ATM calls and puts.

Buy 2 ATM calls (+0.50*2)*100= +100 deltas

Buy 2 ATM puts (-0.50*2)*100= -100 deltas

In a delta neutral strategy, it is very important to keep the delta 0 in order not to be influenced by the stock direction. When after getting into a trade, the stock moves far from the entry point before the event you are waiting for happens, you need to carefully adjust your position in order to keep it delta neutral and not be affected by the trade direction.

Free Tutorials - Stocks, Options, ThinkorSwim and more.. Click Here!

In the next GroWithYou Trading Tutorial:

• Options Neutral Strategies;
• The Long Straddle;
• Outlook and Timeframe of a Straddle.

Keep learning about Options Strategies and ThinkorSwim by going to:

• Trading Stock Options Neutral Strategies - The Long Straddle

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