In finance, delta neutral describes a portfolio of related financial securities, in which the portfolio value remains unchanged due to small changes in the value of the underlying security. Such a portfolio typically contains options and their corresponding underlying securities such that positive and negative delta components offset, resulting in the portfolio's value being relatively insensitive to changes in the value of the underlying security.
A related term, delta hedging is the process of setting or keeping the delta of a portfolio as close to zero as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re-hedged too frequently.
Read more about Delta Neutral: Nomenclature, Mathematical Interpretation, Creating The Position, Theory
Famous quotes containing the word neutral:
“The lonely Earth amid the balls
That hurry through the eternal halls,
A makeweight flying to the void,
Supplemental asteroid,
Or compensatory spark,
Shoots across the neutral Dark.”
—Ralph Waldo Emerson (1803–1882)