Explain the Concept of "Delta Neutrality" and Why It Is a Constant Moving Target for an Options Market Maker ▴ Learn

Explain the Concept of “Delta Neutrality” and Why It Is a Constant Moving Target for an Options Market Maker.

Delta neutrality is a portfolio strategy where the overall delta is zero, meaning the portfolio's value is not affected by small changes in the underlying asset's price. Market makers achieve this by balancing their options positions with trades in the underlying asset.

However, as the underlying price changes, the delta of the options also changes (a property measured by gamma). This means a perfectly delta-neutral portfolio will not stay neutral for long.

Market makers must constantly adjust their hedges by buying or selling the underlying, making delta neutrality a dynamic and continuous process.

Does a High Gamma Position Benefit from Large Price Moves or Small Price Moves?

What Is the Concept of “Moneyness” (In-the-Money, Out-of-the-Money) for a Call Option?

Why Is a Delta-Neutral Portfolio Not Perfectly Hedged against Large Price Moves?

What Is Gamma and Why Is It Important for Managing a Delta-Hedged Portfolio?