CHAPTER 10

Delta-Neutral Trading Strategies

We have now explored in detail the principal delta-neutral trading strategies that may be used for consistent income generation: at-the-money (ATM) calendars, double calendars, double diagonals, ATM butterflies, ATM iron butterflies, condors, and iron condors. The individual risk characteristics of these strategies are summarized in Table 10.1.

Don’t interpret the data of Table 10.1 too precisely; the objective of this table is to generalize among the delta-neutral trading strategies and make some broad comparisons and contrasts. Returns for these strategies vary considerably from condors and iron condors at the low end to butterflies and iron butterflies at the high end. However, any of these trades may be configured in such a way as to vary these values. For example, if we position the spreads of the iron condor much closer to the current value of the underlying index and initiate the trade with about 25 to 30 days to expiration, we have an iron condor with a much smaller risk/reward ratio and a much larger potential return than the standard long-term iron condor, positioned outside of one standard deviation with 50 days to expiration. But to a first approximation, butterflies will generally have higher potential returns and smaller risk/reward ratios than condors.

The calendars, ...