How to check delta neutral trading in stock market?

Delta Neutral Trading

Delta neutral position to market maker.an option market maker is continuously trying to buy option for less and sale for greater than what they believe the option is both based on their model. When market maker is able to trade and option at one of these favourable price says they will lock in their profit and his their position through an offsetting trade in the under laying stock.

Delta neutral

when delta neutral or relative Lee small price move will have little impact on the profit or loss related to the spread.The delta of an option is an indication of how much in value that option is expected to change based on a a 1 point change in the underlying security. If and TCS 2800 call has delta of 0.50 lo then the value of that option would be expected to gain 0.50 if TCS goes off by a point. A call option is limited to a minimum delta of zero and a maximum delta of 1.an option should not go off by more than a point based on price change if an underlying stock goes off by a point.conversely for an option with little or no value if I stock moves by a point it is possible for the option to experience no price change based on delta this case would be an option with a delta of 0.

Put  have negative delta as a put is expected to lose value when a stock moves higher and gain value when stock move lower.for example if a put option has a delta of -0.50 1 point drop in the underlying should result in again for the option of this goes back to early math education and concept that a negative multiplied by a negative equals a positive.

Delta neutral position will have a combinations of long and short elder exposure to the underlying. The result will be limited price exposure to the stock or market that is being traded.the exact exposure that is taken on through each individual stock or options contract is determined. They are then match of to eliminate price exposure.if one positions has a delta exposure equivalent to long 500 share of TCS and another positions is held that has a delta exposure of sought 500 share of TCS the combinations results in a delta neutral position.

Delta neutral position should result in no gain or loss through the combination position for small price change in the underlying whenever price undergo large change the delta of underlying option change also.when there is a change in the delta the mutual price exposure that the positions has does not exist anymore. The brick that relates to this concept is known as Gamma and have covered in the the previous section.