1.2. Market-Neutral Option Trading Strategies

Market-neutral positions are relatively insensitive to the direction of price fluctuations. With regard to options, this means that a small change in the price of the underlying asset has no significant effect on position value. If a large price movement does affect the position, its value changes by approximately the same amount regardless of the direction of price movement. The main tool used in creating market-neutral strategies is the index delta. The position is considered to be market-neutral if the cumulative delta of all its components equals zero. Such a position is called “delta-neutral.” We will use both terms (“market-neutrality” and “delta-neutrality”) interchangeably.

1.2.1. Basic Market-Neutral Strategy