Chapter 40: Advanced Concepts 
Using deltas, the following spread appears to be neutral: 
Buy l January bean 57 5 call at 19 .50 
Sell 6 January bean 675 calls at 2.25 
Net position: 
19.50 DB 
13.50 CR 
6 Debit 
879 
At the time the original example was presented, it was demonstrated through 
the use of the profit picture that the ratio was too steep and problems could result in 
a large rally. 
Now that one has the concept of gamma at his disposal, he can quantify what 
those problems are. 
The position gamma of this spread is quite negative: 
Position gamma = .01 - 6 x .0026 = -0.0056 
That is, for every 10 points that January soybeans rally, the position will become 
short about 1/2 of one futures contract. The maximum profit point, 675, is 92 points 
above the current price of 583. While beans would not normally rally 92 points in 
only a few days, it does demonstrate that this position could become very short if 
beans quickly rallied to the point of maximum profit potential. Rest assured there 
would be no profit if that happened. 
Even a small rally of 20 cents (points) in soybeans - less than the daily limit -
would begin to make this tiny spread noticeably short. If one had established the 
spread in some quantity, say buying 100 and selling 600, he could become seriously 
short very fast. 
A neutral spreader would not use such a large ratio in this spread. Rather, he 
would neutralize the gamma and then attempt to deal with the resulting delta. The 
next section deals with ways to accomplish that. 
CREATING MULTIFACETED NEUTRALITY 
So what is the strategist to do? He can attempt to construct positions that are neutral 
with respect to the other factors if he perceives them as a risk. There is no reason why 
a position cannot be constructed as veg a neutral rather than delta neutral, if he wants 
to eliminate the risk of volatility increases or decreases. Or, maybe he wants to elim­
inate the risk of stock price movements, in which case he would attempt to be gamma 
neutral as well as delta neutral. 
This seems like a simple concept until one first attempts to establish a position 
that is neutral with respect to more than one risk variable. For example, if one is