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.

RELATED TERMS
  1. Delta Neutral

    A portfolio consisting of positions with offsetting positive ...
  2. Delta Hedging

    An options strategy that aims to reduce (hedge) the risk associated ...
  3. Gamma Neutral

    A method of managing risk in options trading by establishing ...
  4. Neutral

    1) A term that describes an option on a security or market that ...
  5. Gamma Hedging

    An options hedging strategy designed to reduce or eliminate the ...
  6. Short Leg

    Any contract in an option spread in which an individual holds ...
Related Articles
  1. Markets

    Delta Air Lines: Buy the Dips? (DAL)

    After soaring more than fivefold since late 2012, shares of Delta Air Lines (NYSE: DAL) have gotten off to a bad start in 2015. After hitting an all-time high of $51.06 in late January, the ...
  2. Markets

    Don't Panic About Delta's Weak Unit Revenue (DAL)

    On Tuesday, Delta Air Lines (NYSE: DAL) reported weak unit revenue results for the month of May and reduced its unit revenue guidance for the current quarter. After several years of posting ...
  3. Trading

    Using "The Greeks" To Understand Options

    These risk-exposure measurements help traders detect how sensitive a specific trade is to price, volatility and time decay.
  4. Markets

    Delta Air Lines Announces Another Big Buyback (DAL)

    Two years ago, Delta Air Lines (NYSE: DAL) marked the beginning of a new era in the airline industry when it began paying a $0.06 quarterly dividend and announced a $500 million share buyback ...
  5. Markets

    Don't Fear Delta Air Lines' Hedging Losses (DAL)

    Delta Air Lines (NYSE: DAL) has actively hedged its fuel costs in recent years in order to guard against the risk of oil price spikes. This strategy has proven counterproductive in the last ...
  6. Trading

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  7. Trading

    Options Pricing: The Greeks

    Many option traders rely on the "Greeks" to evaluate option positions. The Greeks are a collection of statistical values that measure the risk involved in an options contract in relation to certain ...
  8. Markets

    Delta Air Line's Potential Pitfalls (DAL)

    During Delta Airline's (NYSE: DAL) fourth-quarter 2014 earnings call in late January, CEO Richard Anderson rattled off the following impressive statistics about the company and its stock: We ...
  9. Trading

    Options Greeks: Options and Risk Parameters

    by John Summa (Contact Author | Biography)This segment of the options Greeks tutorial will summarize the key Greeks and their roles in the determination of risk and reward in options trading. ...
  10. Markets

    Delta Stock to Trade Ex-Dividend Monday (DAL)

    Delta will send its dividend payment on June 1 to shareholders of record as of May 11.
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 are the limitations of using delta to hedge options?

    Learn about the delta of an option, how to delta hedge an option position and the limitations of using delta to hedge an ... Read Answer >>
  6. Is there a better metric for hedging options than delta?

    Learn about delta and gamma hedging options, why gamma is a better metric to use to hedge and how gamma can be used with ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center