Neutral strategy is one of the advantages of options trading. The objective of the strategy is to neutralize one of the Greeks, in the case of Delta Neutral Strategy; obviously we are trying to neutralize the Delta. Such a strategy has no effective exposure to changes in the price of the underlying asset. The Delta of the option or the underlying asset will be hedged away. 

Delta neutral is very important concept for Options Trading. The net delta of the option strategy, including position of the underlying asset, is neutral and has no market bias. 

The delta of the underlying asset, for example stock, is 1.00 if you long the stock. And at-the-money option will have a delta of close to 0.50. Therefore, to construct a Delta Neutral strategy, simply long 1 share (delta=+1.00), and sell 2 call options (delta= -0.5 - 0.5 = -1.00), it will give you a delta neutral position.

Delta Characteristics: 

1. Options that deep in the money have Delta close to 1.00. 
2. Options that deep out of the money have Delta close to 0.00. 
3. Option at-the-money has Delta of close to 0.50. 
4. If you short the call option or underlying asset, the Delta becomes negative.
5. Put options have negative delta.
6. The delta of the underlying asset is 1.00 constantly.
7. Delta of the options increases as the option goes further in-the-money; It decreases as the option goes further out of the money.

Some important points to be remembered: 

1. If you buy a share, your delta is +1.00, if you short a share, your delta become -1.00. 
2. If you buy an At-the-money call, your delta is close to +0.50. On contrary, if you sell an At-the-money call, your delta is close -0.50. This applies to Put option with different polarity. 
3. It is difficult achieve a delta zero position in reality, but you need to start a position close to delta zero, therefore you initialize a Delta Neutral position. 
4. You need to have options of at least 30 – 60 days remaining before expiration to mitigate the risk of time-decay.
5. If your position does not moves that much that able to shift the position delta or moving sideway, close the entire position. The time decay will eat away the time value in the option you buy, unless you are the seller instead of buyer of options.

Delta Neutral Strategy set up examples: 

1. Only Options

a. Straddle - Buy an ATM call (delta: 100 x +0.50 = +5.00) and buy an ATM put (delta: 100 x -0.50 = -5.00)

b. Strangle - Buy an Out the money call and buy an Out the money put, which both has the very close delta

2. Stock + Options

a. Buy 100 shares (delta: 100 x +1 = +100) and buy 2 ATM puts (delta: 2 x 100 x -0.50 = -100)

b. Buy 100 shares and sell 2 ATM calls, which have the same delta position as above example. 

c. Obviously, you can do the opposite by shorting the stock and buy the call options, but this strategy may involves a lot of risk which not suitable for beginner trader. Besides, you may need to be careful of the margin trading regulation before you choose to short the position.

How does Delta Neutral Strategy make profit? 

• The main advantage of Delta Neutral strategy is that you are able to make a profit without taking any directional risk. 
• You need to adjust the delta back to zero when the market move so much that shifting your position delta.
• Therefore your aim is to adjust the position constantly by selling or buying the options or underlying asset in order to make profit by doing these adjustments.