# Schweswer practice exam qn: options

I am not sure, if this qn was addressed but the gist of question goes like this: Portfolio manager long stock X, wants to hedge against decling so he will do: a. add call options to portfolio as option delta moves closer to zero b. add call options to portfolio as option delta moves further away from zero c. add put options to portfolio as option delta moves further away from zero d. add put options to portfolio as option delta moves closer to zero the answer is d… can anyone explain why… when you are long a stock, and you want to hedge, i presume you would buy at ATM put option to hedge…as stock prices goes down, you will buying more options, effectively moving closer to -1 not zero…

0 to -1 is for puts…thus as a call reaches 0 it is moving out of the money

Im not sure if the wording of the answers is a bit confusing. Should it be phrased as the nett position delta moving closer to zero? You would add puts to hedge your positions. Stock has delta of +1 so adding puts (0 to -1) will help to bring it close to a delta-neutral level .

To protect a portfolio against an expected decrease in the value of a long equity position, put options should be purchased (i.e., a protective put strategy). The number of puts to purchase depends on the hedge ratio which is equal to the option’s delta. Because the delta of the put options is negative, as the option delta moves closer to zero, the number of options necessary to maintain the hedge will increase… … this is answer… but when an option moves to zero… it should be getting close being out of the money… so how can the number of option increase?

No of option to hedge = No of stock / delta of option. So when delta goes to zero, you need more options to completely hedge your position.

Thx disptra… i mathematically computed this and it makes sense… thx…

you need more puts to cover as you get out of the money. If you are in the money (or at the money) your delta is close to 1. So for 100shares, you need one contract… If you are lets say at 100\$, and you puts are for 50 bucks strike, you need more and more as it moves upwards from 100… my explaining sucks

unanju Wrote: ------------------------------------------------------- > To protect a portfolio against an expected > decrease in the value of a long equity position, > put options should be purchased (i.e., a > protective put strategy). The number of puts to > purchase depends on the hedge ratio which is equal > to the option’s delta. Because the delta of the > put options is negative, as the option delta moves > closer to zero, the number of options necessary to > maintain the hedge will increase… Can somebody explain to me why C is not correct?

delta -0.5 -0.3 long stock 100 100 options 100/.5 100/.3 put options -200 -333.3333333 so as delta go down the number of puts added is higher. thx disptra… as i computed this… it made… hope this helps kabii