Option Greek

CFA Level II
#1

Two call options have the same delta but option A has a higher gamma than option B. When the price of the underlying asset increases, the number of option A calls necessary to hedge the price risk in 100 shares of stock, compared to the number of option B calls, is a: A) larger (negative) number. B) larger positive number. C) smaller (negative) number. D) smaller positive number. Your answer: D was incorrect. The correct answer was C) smaller (negative) number. For call options larger gamma means that as the asset price increases, the delta of option A increases more than the delta of option B. Since the hedge ratio for calls is – 1/delta, the number of calls necessary for the hedge is a smaller (negative) number for option A than for option B. Why isn’t it D? I get why its a smaller number, I just don’t get why negative or positive.

#2

So if gamma is higher then after the price move, deltanew(A) > deltanew(B). so 1/deltaNew(B) > 1/deltanew(A) and since you’re hedging you’re selling calls.

#3

thanks JD…i just read thru the concept once again…i 4got u short the calls… my retention power is becoming inversely proportional to the amount of time spent on studying…

#4

Both C and D can be correct. For example, if you short the 100 stocks then in that case you will need to long the calls to get a delta neutral portfolio. What I want to say is that you don’t always short the calls. Everything depends on the position you have taken in stocks. Since the question doesn’t mention whether you have shorted or longed the stocks I think both C and D are correct.

#5

Been there, done that. You’re doing fine.

#6

kabhii Wrote: ------------------------------------------------------- > Both C and D can be correct. > > For example, if you short the 100 stocks then in > that case you will need to long the calls to get a > delta neutral portfolio. What I want to say is > that you don’t always short the calls. Everything > depends on the position you have taken in stocks. > > Since the question doesn’t mention whether you > have shorted or longed the stocks I think both C > and D are correct. That’s true, I guess, but it seems pretty clear that when someone says I am hedging a position in [blah], they mean a long position in [blah].