Why Trade Delta Neutral?
A few years ago, I was teaching a class on option trading. Before the
seminar began, I was talking with one of the students in attendance. I asked
him what he hoped to learn in the class. He said that he was really
interested in learning how to trade delta neutral. When I asked him why he
was interested in that specific area of trading, he replied, “I hear that’s
where all the big money is made!”
This observation, right or wrong, probably stems from the fact that in the
past most of the trading in this esoteric discipline has been executed by
professional traders. There are two primary reasons why the pros have
dominated this strategy: high commissions and high margin requirements
for retail traders. Recently, these two reasons have all but evaporated.
First, the ultracompetitive world of online brokers has driven
commissions for retail traders down to, in some cases, what some market
makers pay. Second, the oppressive margin requirements that retail option
traders were subjected to until 2007 have given way to portfolio margining.