What Is ‘Delta-Neutral’ Hedging and Why Is It Crucial for Option Market Makers?

Delta-neutral hedging involves structuring a portfolio so that the total delta is zero. Delta measures the option price sensitivity to the underlying asset's price.

By maintaining a zero delta, the market maker minimizes directional risk, meaning the portfolio's value is relatively insensitive to small movements in the underlying asset's price. This allows them to profit from the option premium and volatility, rather than directional bets.