Delta neutral hedge fund
What Does Delta Neutral Mean?
A portfolio consisting of positions with offsetting positive and negative deltas. The deltas balance out to bring the net change of the position to zero.
What does delta neutral trading do? It is simply designing an options position which will make money no matter if the stock goes up or down and increase in value as volatility in the market rises even if the stock remained stagnant. Yes, literally making money 3 ways, up, down or stagnant!
So what’s the catch? Yes, there are only 2 scenarios where a delta neutral position loses money. One, when the stock remains relatively stagnant while volatility drops. When volatility drops, extrinsic value of options get depressed as the possibility of large moves decreases, thereby decreasing the value of the options in the position even if the stock did not move. Two, the stock did not move enough to cross the breakeven point of the position. Yes, all trading positions have break even points which must be exceeded before money can be made.
Even with these limitations, delta neutral trading continues to offer the greatest possibility of profit under conditions of volatility and extreme uncertainty