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.
Glossar
Neutrality
Equilibrium ⎊ ⎊ In cryptocurrency and derivatives markets, neutrality frequently manifests as a state of equilibrium, where opposing forces ⎊ buying and selling pressure ⎊ are balanced, resulting in limited directional price movement.
Delta Neutrality
Strategy ⎊ Delta neutrality, within cryptocurrency derivatives, represents a portfolio construction technique aiming to minimize directional risk exposure to price fluctuations.
Target
Precision ⎊ A target, within cryptocurrency derivatives and financial markets, denotes a predetermined price level or state serving as a focal point for trading strategies and risk management protocols.