A position is delta-neutral when its value barely changes for a small move in the price of the underlying asset. Delta-neutral means neutral to price. It does not mean neutral to risk.
What is delta?
Delta is how much a position’s value changes for a small move in the price of the underlying. One unit of an asset held in spot has a delta of one: it moves with the price. A short future on one unit has a delta of about minus one. Held together, the deltas add up to about zero.
How do you make a position delta-neutral?
By pairing exposures that offset. The simplest version holds an asset and shorts the same amount of a future on it. A price rise lifts the spot leg and costs the short leg about the same amount. A price fall does the reverse.
Why only “about” zero?
Because the hedge drifts. As prices move, the two legs stop matching exactly. Funding payments build up on one side, margin changes on the short, and legs held on different venues see slightly different prices. A delta-neutral book has to be rebalanced to stay neutral, and rebalancing costs money.
What does the hedge remove?
Directional price exposure. Within the range where the hedge holds, the position does not profit from price going up or lose from price going down.
What does it leave behind?
Everything else:
- Funding and basis, which can turn against the position
- Trading, financing and transfer costs
- Liquidation risk on the short leg, which can arrive before the other leg can be used to top up margin
- Venue, custody and counterparty risk
- Execution risk: fills that differ from the model
Where does the risk go?
Into the details. Sizing, margin, rebalancing rules and venue choice decide how a delta-neutral book behaves under stress. That is why OpenBasis publishes each sealed design in full and puts each study through an independent adversarial audit: so the details can be checked. The practice →