Answer: Sell short-term options + buy long-term options (~ ATM)

## Explanation Let's analyze the current position Greeks: - **Theta = +25,000** (positive): The position benefits from time decay - **Vega = +330,000** (positive): The position benefits from increasing volatility - **Gamma = -200** (negative): The position has negative convexity To hedge this position, we need to: 1. **Reduce positive vega** (sell options) 2. **Reduce positive theta** (sell options) 3. **Increase gamma** (buy options to offset negative gamma) Now analyzing the trades: **Option A: Sell short-term options + sell long-term options** - Selling options increases negative theta (good for hedging positive theta) - Selling options increases negative vega (good for hedging positive vega) - Selling options increases negative gamma (BAD - makes negative gamma worse) - This would make gamma more negative, not hedge it **Option B: Sell short-term options + buy long-term options** - **Sell short-term options**: - High negative theta (good for hedging positive theta) - Negative vega (good for hedging positive vega) - Negative gamma (bad for gamma hedging) - **Buy long-term options**: - Positive gamma (GOOD - offsets negative gamma) - Positive vega (partially offsets the vega hedging from short options) - Positive theta (partially offsets the theta hedging from short options) By carefully balancing the quantities, this combination can hedge all three Greeks: - Short-term options provide strong theta and vega hedging - Long-term options provide gamma hedging while having less impact on theta/vega (due to longer maturity) Therefore, **Option B** is the correct hedge.

Author: LeetQuiz Editorial Team