Explanation

When an investor is short 200 shares of stock, this position has negative gamma because:

• Short stock position has gamma = 0 (linear position)
• However, the short position creates directional risk that needs hedging

By purchasing call options, the investor is adding positive gamma to the portfolio:

• Long call options have positive gamma
• Each call option contract typically covers 100 shares
• Two call option contracts cover 200 shares

Gamma Analysis:

• Short stock position: gamma ≈ 0
• Long call options: positive gamma
• Net portfolio gamma: positive

However, the key insight is that the investor is using calls to hedge a short position. When hedging a short stock position with long calls, the overall portfolio becomes gamma positive because:

• The long calls provide convexity (positive gamma)
• The short stock position has no gamma
• Therefore, the net gamma is positive

Correct Answer: C (gamma positive)

The portfolio is gamma positive because the long call options provide positive gamma, while the short stock position has zero gamma.