12. "Delta-Neutral" is a Relative Concept - Not an Absolute Concept

Delta neutral volatility trading can be confusing to traders who interpret "delta neutral" in an absolute, rather than relative, way.

It pays to remember that delta neutral option spreads merely begin neutral on market direction. The deltas change as time goes by and as the futures rally or decline.

Long straddles and long strangles, for example, get increasingly delta long as the market rallies and shorter as it declines. Call ratio backspreads get longer with rallies and put ratio backspreads get shorter with declines. The amount the deltas change is described by the Greek parameter "gamma," which is a mathematical way of explaining how steep the position's "U-shaped" performance curves are.

This means "premium buyers" like market movement. They initiate positions with deltas near neutral because they don't want to lose money by incorrectly guessing market direction. And they also buy options when they're undervalued or when implied volatility is rising. That's a way to earn profits independently from market movement.

Of course, "premium sellers" establish short straddles, short strangles, call ratio spreads and put ratio spreads when options are overvalued, when implied volatility is declining, and when the futures are non-volatile. They acquire upside-down U-shaped performance curves, so they favor non-trending, non-volatile markets.

In summary, trading options is a dynamic process that requires flexibility when establishing positions as well as when adjusting positions in response to changes in the markets.

"Knowledge is power and all traders can benefit by continually bolstering their knowledge base. I hope to contribute in that regard."  Paul Forchione