Creating The Position
Delta hedging - i.e. establishing the required hedge - may be accomplished by buying or selling an amount of the underlier that corresponds to the delta of the portfolio. By adjusting the amount bought or sold on new positions, the portfolio delta can be made to sum to zero, and the portfolio is then delta neutral.
Options market makers, or others, may form a delta neutral portfolio using related options instead of the underlying. The portfolio's delta (assuming the same underlier) is then the sum of all the individual options' deltas. This method can also be used when the underlier is difficult to trade, for instance when an underlying stock is hard to borrow and therefore cannot be sold short.
One example of delta neutral strategy is buying a deep in the money call and buying a deep in the money put option. Deep in the money call will have delta of 1 and deep in the money put will have delta of -1. Hence their deltas will cancel each other to some extent of stock price movement.
Read more about this topic: Delta Neutral
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