Over the next few posts I’ll explore the potential benefits of delta neutral trading, a very aggressive approach to risk management. While you’re never going to hit a 10 bagger with this tactic, the good news is there is virtually no drawdown and for longer term IRA accounts, a muted but reliable capital appreciation.
Most traders know the DELTA of a option measures how much an option can be expected to move relative to a $1 move in stock price. A delta neutral option position is therefore a situation where there is no gain or loss as a result of stock price movement. Now, books have been written about various setups to realize this static state and I’m not going to attempt to consider the merits of any of them. What I want to examine is a delta neutral stock/ETF position where the trader is long and short the same number of shares at the same time so that no matter how the stock/ETF moves there is no overall gain or loss. While most brokers don’t permit concurrent long/short positions there are actually 2 simple solutions: 1–Set up 2 accounts, one long and one short, or 2–Trade ETFs and their inverse, such as SPY/SH , TLT/TBT, QLD/QID and many more as the inverse offerings grow daily. So, how do you make money with this idea? Would you be satisfied with a risk free 8-12% APR.? Better than any money market fund or CD you’re likely to find for the next 20 years or so and, here’s the surprise…..it’s not difficult to implement and requires only monthly maintenance.
Tomorrow we’ll look at one delta neutral setup that can deliver the goods along with a few caveats.
