If you buy a straddle, do you have to buy underlying eg (50 short futures and 50 long) or do nothing b/c it is

Question

delta neutral

Answer 1

When you buy a straddle you usually just buy call and put options with the same strke price and expiration date.

If you want to be delta neutral you usually have two choices. One choice is to ratio the options to be delta neutral. The other choice is to use the underlying to adust the delta.

Example:

Assume the closest strike price for an index has calls with a delta of 0.45 and puts with a delta of -0.55.

You could create a delta neutral straddle by buying 11 calls and 9 puts. (11 x 0.45) = (9 x 0.55)

If you bought 10 calls and 10 puts your delta would be

(10 x 0.45) + (10 x -0.55) = -1 so you could make the spread delta neutral by buying a future on the index.

If you are interested, there is some discussion of long straddles on an index at

http://www.cboe.com/Strategies/IndexOpti...