870 
FIGURE 40-8. 
XYZ ratio spread. 
f/) 
f/) 
3000 
2000 
.3 1000 
~ 
e a.. 
(r.> 
40 
Part VI: Measuring and Trading Volatility 
45 55 60 
At Expiration 
Stock Price 
Thus, a delta neutral straddle position would consist of buying 8 J anua:ry 50 calls 
and buying 11 Februa:ry 50 puts. The straddle has no market exposure, at least over 
the short term. Note that the delta neutral straddle has a significantly different prof­
it picture from the delta neutral ratio spread, but they are both neutral and are both 
based on the fact that the Janua:ry 50 call is cheap. The straddle makes money if the 
stock moves a lot, while the other makes money if the stock moves only a little. (See 
Figure 40-9.) 
Can these two vastly different profit pictures be depicting strategies in which 
the same thing is to be accomplished ( that is, to capture the underpriced nature of 
the XYZ Janua:ry 50 call)? Yes, but in order to decide which strategy is "best," the 
strategist would have to take other factors into consideration: the historical volatility 
of the underlying security, for example, or how much actual time remains until 
Janua:ry expiration, as well as his own psychological attitude toward selling uncovered 
calls. A more precise definition of the other risks of these two positions can be 
obtained by looking at their position gammas. 
Delta Neutral Is Not Entirely Neutral. In fact, delta neutral means that 
one is neutral only with respect to small price changes in the underlying securi­
ty. A delta neutral position may have seriously unneutral characteristics when