Chapter 37: How Volatility Affects Popular Strategies 
EFFECTS ON NEUTRALITY 
755 
A popular concept that uses delta is the "delta-neutral" spread a spread whose prof­
itability is supposedly ambivalent to market movement, at least for short time frames 
and limited stock price changes. Anything that significantly affects the delta of an 
option can affect this neutrality, thus causing a delta-neutral position to become 
unbalanced ( or, more likely, causing one's intuition to be wrong regarding what con­
stitutes a delta-neutral spread in the first place). 
Let's use a familiar strategy, the straddle purchase, as an example. Simplistically, 
when one buys a straddle, he merely buys a put and a call with the same terms and 
doesn't get any fancier than that. However, it may be the case that, due to the deltas 
of the options involved, that approach is biased to the upside, and a neutral straddle 
position should be established instead. 
Example: Suppose that XYZ is trading at 100, that the options have an implied 
volatility of 40%, and that one is considering buying a six-month straddle with a strik­
ing price of 100. The following data summarize the situation, including the option 
prices and the deltas: 
XYZ Common: l 00; Implied Volatility: 40% 
Option 
XYZ October l 00 call 
XYZ October l 00 put 
FIGURE 37-2. 
Price 
12.00 
10.00 
Delta 
0.60 
-0.40 
Value of delta of a 6-month option at differing implied volatilities. 
90 
80 
70 
.!!l 
ai 60 
Cl 
C: 50 ,g 
8° 40 
30 
20 
10 
60 80 100 
Stock Price 
120 140