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training_data/curated/text/619b8a0795ecae92a4b1311d488a05df2b7dd82a5ed38fc3d2ae312bf6c3ff27.txt

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+868 Part VI: Measuring and Trading Volatility 
+They are useful in establishing a new position, because one can see how much expo­
+sure he is taking on. In addition, they are extremely useful for follow-up action, since 
+one can see how his position's characteristics have developed in the current market­
+place at the present time. In the following sections, the use of the risk measurement 
+tools as aids in establishing a position or in following up on a position will be dis­
+cussed in detail. 
+DELTA NEUTRAL 
+One popular type of neutral position is to be delta neutral - that is, to have the equiv­
+alent stock position (ESP) or equivalent futures position (EFP) be zero. A delta neu­
+tral position is one in which the sum of the projected price changes of the long options 
+in the spread is essentially offset by the projected price changes of the short options 
+in the same spread. 
+Example: XYZ is trading at 50. The following three options are trading with the 
+prices and deltas indicated. Furthermore, the "theoretical value" of each option is 
+shown: 
+XYZ:50 
+"Theoretical 
+Option Price Delta Value" 
+January 50 call 3.00 0.55 3.50 
+January 55 call 1.50 0.35 1.48 
+February 50 put 3.50 -0.40 3.44 
+Assuming that one can rely upon these "theoretical values" (a big assumption, 
+by the way), it is obvious that the January 50 call is cheap with respect to the other 
+options: They are close to their values, while the January 50 is 50 cents under. The 
+neutral strategist would want to buy the January 50 call and hedge his purchase with 
+one of the other two options presented. One choice would be to establish a spread 
+wherein the January 50 calls are bought and a number of January 55's are sold. To 
+determine how many are to be bought and sold, one merely has to divide the deltas 
+of the two options: 
+Delta neutral spread ratio = 0.55/0.35 = 11-to-7 
+Thus, a delta neutral ratio spread would consist of buying 7 January 50's and sell­
+ing 11 January 55's. To verify that this spread is neutral with respect to the change in 
+price ofXYZ, notice that ifXYZ moves up in price 1 point, the January 50 will increase