Brian Terry was the first retail trader I interviewed – at that time about his In The Money Call strategy. Now he is back with another favorite options trading strategy: Delta Neutral.
Watch the interview about the Delta Neutral strategy
The video was produced with Streamyard – an easy-to-use and amazing tool for live streaming and recording
Do you like the video? SUBSCRIBE TO THETA PROFITS ON YOUTUBE!
This article will break down his approach, covering the mechanics, risk management, and results. This beginner-friendly strategy focuses on generating consistent income, making it perfect for traders looking for a low-stress approach to options trading.
What is the Delta Neutral strategy?
The Delta Neutral strategy consists of a long-term straddle you sell short-term calls and puts against. Brian trades it in SPY.
First step: A long straddle
Buy a straddle 90 to 120 days out. The strike should be the current price of the underlying.
A straddle is when you buy a long call and a long strike with the same expiration. The straddle makes the most profit if the underlying moves a lot in either direction, as illustrated by the following example illustrated by OptionStrat.
In this example, we have bought a call and put on SPY with the strike price 600 about 110 dates to expiration. The straddle cost us 3737 dollars – and that is also the max loss.
Second step: Sell weekly calls against it
Now you sell a weekly call and put against it – a so-called strangle.
The shorts should be at least at least the expected move away from where the underlying is. Brian typically puts them 1.5 – 2 times the expected move away, and try to collect about 1% of the risked capital each week.
The following graph shows the profit/loss curve for a strangle. It will stay profitable as long as the short call and put ends in the green zone by the expiration date.
By itself a strangle has an unlimited loss potential. However, together with the long straddle, the two components offset each other and reduce the risk significantly.
The graph is produced with OptionStrat – a recommended visualization and analysis tool for options traders.
Managing the Delta Neutral trade
Brian Terry explains how he manages the strategy in detail in the video – and I do recommend that you watch the whole interview.
However, here is a summary of his management rules:
– He only opens a new Delta Neutral trade when the VIX is low. His rule of thumb is that the VIX should be below 18. A low VIX means that the straddle will be cheaper to buy. If the VIX then jumps, the straddle may see a nice gain in value.
– If SPY moves away from the initial strikes, the straddle will be recentered, preventing the trade from becoming overly risky on one side. The recentering can be done by rolling each of the longs to the new value. The expiry date will be the same.
– If a short call or put approaches its strike price, Brian rolls it out to the next week and adjusts the strikes to keep the trade safe. He never lets short options expire in the money.
– If adjustments can’t keep the position profitable, Brian prefers to close the whole trade and start over again.
– The Delta Neutral trade will in any case be closed at 60 days to expiration to avoid that theta eats too much of the value of the straddle.
The risk profile
When asked to place his delta neutral strategy on a risk profile scale from 1 to 10, Brian Terry rates it as a 2 or 3, emphasizing its low-risk nature. He explains that the strategy is designed to remain delta neutral, avoiding directional bias and minimizing volatility-related stress. The careful management of adjustments and rebalancing further reduces risk.
Brian Terry explains that the worst-case scenario for his Delta Neutral strategy occurs if the SPY experiences a significant move that “blows through” the short call or put, leading to a potential assignment. However, he mitigates this risk by maintaining long calls and puts, which offset each other and reduce losses. Even in such scenarios, the impact of a 1% SPY move on the overall position is minimal. If a 5% move occurs, and adjustments aren’t possible, he would likely close the trade, as it would usually still be profitable by that point.
Results and benefits of the Delta Neutral strategy
Brian Terry underlines that the strategy is still in under development. So far it has generated around 1% weekly returns.
In the video, Brian emphasizes three benefits of the strategy:
– Consistent Income:
Weekly premiums from selling options help offset the costs of the long straddle and generate profit.
– Low Stress:
Unlike directional trades, this strategy doesn’t rely on predicting market movements, making it ideal for traders who prefer a calm and steady approach.
– Scalable and Flexible:
The strategy can be scaled based on account size and paused during busy periods. For example, Brian often skips selling weekly options when he’s on vacation, letting the long straddle ride passively.
