Delta Spread

DEFINITION of 'Delta Spread'

An options trading strategy where the trader initially establishes a delta neutral position. The trader creates this delta neutral position by simultaneously buying and selling options in proportion to the neutral ratio. Using a delta spread, a trader usually expects to make a small profit if the underlying security does not change widely in price. However, larger gains or losses are possible if the underlying security's prices changes significantly in either direction.

BREAKING DOWN 'Delta Spread'

The most commonly discussed delta spread is a calendar spread. The calendar spread involves constructing a delta neutral position using options with different expiration dates. In the simplest example, a trader will simultaneously sell near-month call options and buy call options with a later expiration in proportion to their neutral ratio. Since the position is delta neutral, the trader should not experience gains or losses from small prices moves in the underlying security. Rather, the trader expects the price to remain unchanged, and as the near month calls lose time value and expire, the trader can sell the call options with longer expiration dates and hopefully net a profit.

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RELATED FAQS
  1. What are common delta hedging strategies?

    Learn about common delta hedging strategies, including how to make a position in options delta neutral by offsetting risk ... Read Answer >>
  2. Why does delta only range from 1 to -1?

    Learn what the option Greek delta is, what affects the value of delta for an option and why the delta of an option can only ... Read Answer >>
  3. How can you use delta to determine how to hedge options?

    Learn what delta is, how to use delta to hedge options and how to maintain a delta-neutral position by delta-hedging options ... Read Answer >>
  4. What industries typically use delta hedging techniques?

    Learn what industries use delta hedging techniques for options trading, and understand how delta neutral trading strategies ... Read Answer >>
  5. What does it mean to say that a straddle is "delta neutral?"

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