Delta Positive Gamma Neutral

A Specific Portfolio Configuration

A "Delta Positive, Gamma Neutral" portfolio is a specific type of options strategy that combines a directional bias (positive delta) with a desire to limit sensitivity to changes in that directional exposure (gamma neutral). This portfolio benefits from the underlying asset price increasing, while being less affected by large, unexpected price swings.

Understanding the Components:

• Delta Positive:
  • The portfolio is positioned to profit from an increase in the price of the underlying asset. A positive delta indicates that the portfolio's value will generally increase as the asset price rises.
  • This can be achieved by owning more calls than puts, or by having a net long position in the underlying asset itself.
• Gamma Neutral:
  • The portfolio is designed to be insensitive to changes in delta. Gamma neutrality helps to stabilize the portfolio's delta exposure, reducing the need for frequent rebalancing and providing protection against large, unexpected price movements.

How to Construct a Delta Positive Gamma Neutral Portfolio:

This usually involves a multi-step process, carefully balancing different option positions:

1. Establish a Delta Positive Position:

   • Buy Call Options: A simple way to create a delta positive position is to purchase call options.
   • Sell Put Options: Selling put options also creates a delta positive position (you are obligated to buy if the price falls below the strike price, so you profit if the price rises).
   • Buy the Underlying Asset: Directly purchasing the underlying asset will give you a delta of 1 per share.
   • Choose the Option Strategy: Vertical spreads, calendar spreads, and ratio spreads can all be used to achieve a specific delta target.

2. Offset the Gamma:

   • Achieving Gamma neutrality requires using other options to offset the gamma of the initial delta positive position. Common techniques include:
     • Buying or selling options with different strike prices: This is the most common approach.
     • Using options with different expiration dates: This can also affect the overall portfolio gamma.
   • Remember: Because options have positive gamma, you need to combine long and short option positions to achieve gamma neutrality. You typically cannot achieve gamma neutrality with just the underlying asset.

3. Balance Delta and Gamma:

   • Achieving both a specific delta target and gamma neutrality simultaneously can be challenging. It often requires an iterative process of adjusting the positions and recalculating the Greeks.

Example Strategy: Long Call Butterfly Spread

• Description: Buy one call option at a lower strike price, sell two call options at a middle strike price, and buy one call option at a higher strike price. All options have the same expiration date.
• Delta Profile: The initial delta will be positive (because you are buying more options at a lower strike price).
• Gamma Profile: The gamma profile of a butterfly spread is designed to be close to neutral.

Why Use a Delta Positive Gamma Neutral Strategy?

• Directional Upside with Limited Risk: You benefit if the underlying asset price increases, but your risk is limited if the price declines or experiences high volatility.
• Reduced Rebalancing: Gamma neutrality helps stabilize your delta exposure, reducing the need for frequent rebalancing.
• Volatility Management: While gamma is neutral, you can still manage Vega exposure separately, allowing you to profit from changes in implied volatility.
• Income Generation: Certain strategies can be structured to generate income while maintaining a delta positive, gamma neutral profile.

Important Considerations:

• Complexity: These strategies can be complex to implement and manage.
• Transaction Costs: Trading multiple options can generate significant transaction costs.
• Vega and Theta Management: Gamma neutrality does not eliminate exposure to Vega (volatility) and Theta (time decay). You need to manage these risks separately.
• Model Risk: Accurate calculation of Greeks is crucial for implementing these strategies.

When to Use a Delta Positive Gamma Neutral Strategy:

• You are moderately bullish on the underlying asset.
• You want to limit your risk if the asset price declines or becomes more volatile.
• You are willing to accept higher transaction costs and complexity in exchange for reduced risk.