Delta Neutral is a portfolio strategy that seeks to minimize the risk of investment in securities. This strategy relies upon the use of multiple positions with balancing positive and negative deltas, resulting in an overall delta of the assets totaling zero. The concept of delta neutral is designed to protect investors against sudden or unexpected market movements. It involves taking equal and opposite positions in the underlying securities or assets, as well as derivatives, such as options and futures contracts.

The primary purpose of delta-neutral strategy is to even out the response of a portfolio to market movements. This strategy is often used by investors to hedge the risk of the portfolio’s underlying assets and reduce the likelihood of significant losses in uncertain economic environments. By taking a delta-neutral position, investors limit their exposure to short-term market changes and focus on the long-term performance of the portfolio.

Options traders also utilize the delta-neutral strategy to take advantage of the movement in implied volatility or time decay of the options contracts that make up the portfolio. Such traders seek to benefit from the fact that the strike prices of an option are in general changing at different rates when the price of the underlying asset moves up or down. Therefore, delta-neutral positions allow traders to benefit from rising or falling markets without exposing their portfolios to additional risks.

In addition, delta-neutral strategies are also employed for hedging purposes, such as when investors want to protect themselves against extreme price movements of a security or index. By taking a delta-neutral position, investors will profit if the market moves against their long positions, and still break even if the market moves in their favor. Therefore, delta-neutral strategies offer investors the flexibility to adjust their portfolios according to the movements in the underlying asset.

In summary, delta-neutral strategies are used to even out portfolio responses to market movements and offer a form of risk management against adverse market conditions. These strategies are popular among options traders as well as investors who seek to hedge against extreme price movements of a security or index. Additionally, delta-neutral strategies offer investors the flexibility to adjust their portfolios according to underlying asset movements.