In the context of portfolio or program trading, it refers to the process of balancing buys (long positions) and sells (short positions), which may be a combination of long and short stock positions or long stock positions and short index futures, etc. Cash neutrality involves offsetting long positions by taking short positions or offsetting trades that are executed in one market by opposing trades in another market (through “legging”). It aims to reduce open directional market risk associated with the unexecuted part of the portfolio/ trade and, in turn, the possibility of loss will be minimized.

Cash neutrality results in a position consisting of equal dollar amounts of long and short stock or any underlying instruments. However, the trader could still be short or long beta and would need to make necessary adjustments.