The option Greek delta measures how much an option moves in relation to the changes in an underlying stock price. It's the ratio that compares changes in an option to changes in the price of the underlying asset.
Delta of an Option
For example, if an investor buys the 0.50 delta call option, this implies that if the underlying stock price gains $1, with all else equal, the value of the option will gain $0.50.
The delta of a call option can range from 0 to 1. The delta of a put option can range from -1 to 0. Whenever an investor buys calls, they are long deltas. On the other hand, when an investor buys puts, they are short deltas.
What Is a Straddle?
A straddle is an option strategy that consists of either the purchase or sale of a call and a put option at the same strike price and expiration period. When traders buy a straddle, they are not making a directional bet. Instead, they are making a bet on the volatility.
More specifically, the trader believes that the option is underpriced. On the other hand, a trader who sells the straddle believes options are overpriced, and also does not have a directional bias on the stock price.
What Are Delta-Neutral Positions?
A delta-neutral position is a position that is created with positive and negative deltas – which are offsetting – to create a position that has a delta of zero.
For example, let's say that a trader buys at-the-money $100 calls and simultaneously buys at-the-money $100 puts. As a result, the trader's position is long the $100 straddle. Generally, the at-the-money calls have a delta of a 0.5, and the at-the-money puts have a delta of -0.5. If both these options are purchased, the deltas offset each other to make it a delta-neutral position.