Delta Neutral Trading For Volatile Markets By Jason Ng At Isnare.com Ezine Articles

The market crash of 2008 introduced levels of volatility that has not been seen for decades. Stocks and options traders alike suffered from a ton of bull and bear traps set on its long way down. Matters got worse when the market lapse into an extended neutral trend since October 2008, making it impossible to profit from directional trades using stocks or options.

Under such market condition, with volatility combined with uncertainty of direction, is there any way to make money at all? Fortunately, there is and the answer is found in what is known as Delta Neutral options trading.

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.

So, what exactly is a delta neutral position? Very simply, delta neutral positions are options based positions which have a delta value of zero or nearly zero but with positive gamma. Such a position increases delta in the direction of the eventual movement of the stock and results in a profit either way, up or down.

There are several ways to make a delta neutral position and the best way to take full advantage of increases in volatility is by buying call and put options in such a proportion as to have their delta value cancel each other out. Another way of putting on a delta neutral position but with a milder volatility effect is by buying stock and then enough put options to cancel out the delta value of the stock.

In fact, delta neutral trading can also be used to protect your stock positions in this uncertain market. For example, you bought a stock that has profited for a few days but the level of uncertainty in the market is building up and you want to not only protect your profits but also continue to profit no matter where that stock might move on next. All you have to do then is to convert your stock position into a delta neutral position by buying enough put options to cancel out the delta value of the stock will do.

As you can see by now, delta neutral trading does offer levels of flexibility and a wider probability of profit in this uncertain and volatile market and you can learn more by visiting http://www.optiontradingpedia.com/delta_neutral_trading.htm .

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