Setting up a delta-neutral position with Out of the money options
I am setting up a delta-neutral position using options only. My goal is to trade implied volatility having always a delta-neutral position. My question is, is there any difference if I do it with at the money options, in the money options or out of the money options?
Since it's a delta-neutral position, I assume it's equivalent to set up a position with out of the money options or in the money options. Am I wrong?
i.e Is it too dangerous to buy OTM options even if it's delta-neutral?
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There is nothing inherently dangerous about an OTM option position except there tends to be more liquidity (and narrower spreads) around the ATM options.
Also the delta will change as the underlying fluctuates, so you might have to make delta adjustments by buying and selling more options or underlying securities to keep it neutral.
With a delta-neutral position using options only, you are essentially trading volatility. OTM options have a lower sensitivity to volatility (vega) than ITM options do, so your expected return will be less with ITM options (but the risk is lower, too).
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