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.

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.