Explanation

This question relates to the convexity bias in delta hedging due to gamma.

For a long call option position:

• Gamma is positive (option value is convex)
• Delta underestimates the actual price change for large moves

For up moves:

• Actual price increase > delta-estimated increase
• Delta approximation is low (underestimates)

For down moves:

• Actual price decrease > delta-estimated decrease
• Delta approximation is high (overestimates the remaining value)

Therefore, the delta approximation is:

• High for a down move (overestimates option value)
• Low for an up move (underestimates option value)

This convexity effect means delta hedging becomes less effective for larger price movements, requiring gamma hedging for better accuracy.