What is Delta Neutral?
A delta neutral position has a total delta of zero, meaning it is not affected by small movements in the underlying asset price. By balancing long and short exposures, delta neutral strategies profit from factors other than direction, such as volatility, time decay, or funding payments.
Achieving Delta Neutrality
Delta neutrality is achieved by offsetting positive delta positions with negative delta positions. This can involve combining long spot with short futures or perpetuals, buying options and hedging with underlying, or combining options with opposite deltas.
For example, if you buy a call option with 0.60 delta, you can sell 0.60 units of the underlying to create a delta neutral position.
Why Trade Delta Neutral
Delta neutral strategies isolate specific factors from price direction. Volatility trading profits from realized volatility exceeding implied volatility, regardless of direction. Yield strategies collect funding or premium without directional bets.
Maintaining Delta Neutrality
Delta changes as prices move due to gamma, so delta neutral positions require rebalancing. Active strategies rehedge frequently to maintain neutrality. Gamma scalping is a strategy that deliberately profits from rehedging.
Delta Neutral Risks
While protected from directional moves, delta neutral positions face other risks. Gamma risk means large moves can create delta before rehedging occurs. Volatility risk applies since positions may still be exposed to implied volatility changes.
Delta Neutral in Crypto
Delta neutral strategies are popular in crypto for yield generation. Cash-and-carry arbitrage, funding arbitrage, and options strategies commonly use delta neutral frameworks.