I'm reading Natenberg's book, and he says that all options trades should be delta neutral.
I understand that this prevents small changes in the underlying price from changing the price of the option, but couldn't there be a case where you would want that?
I (think I) also understand that if you're betting against just volatilty, it would make sense, since you don't care what direction the underlying price moves, but I don't entirely understand why he says all options trades should be delta neutral.
Answer
I haven't read Natenberg but it of course depends on your side in the trade:
Are you a market maker or a risk taker? So do you live on the spread (first) or are trying to make money based on e.g. forecasts on direction (second).
This is the great divide in QuantFinance!
Only in the first case will all your option trades be delta neutral.
There is a nice short paper which elaborates on both concepts (it calls the first one Q and the second P):
Meucci: 'P' Versus 'Q': Differences and Commonalities between the Two Areas of Quantitative Finance http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1717163
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