Explanation

Current Position: Delta neutral, positive gamma

Objective: Make portfolio delta and gamma neutral

Analysis:

• Positive gamma means the portfolio has long option positions (calls or puts)
• To reduce gamma to zero, we need to add negative gamma positions (short options)
• But short options have delta, so we need to hedge that delta with stock positions

Option A: Buy call options and sell stock

• Buying calls adds positive gamma (wrong direction)
• This would increase gamma, not reduce it

Option B: Sell call options and sell stock

• Selling calls adds negative gamma (correct direction to reduce gamma)
• Selling calls has negative delta, selling stock also has negative delta
• This would make the portfolio delta negative

Option C: Buy put options and buy stock

• Buying puts adds positive gamma (wrong direction)
• This would increase gamma

Option D: Sell put options and sell stock

• Selling puts adds negative gamma (correct direction)
• Selling puts has positive delta, selling stock has negative delta
• These can offset to maintain delta neutrality while reducing gamma

Correct Answer: D

Selling put options provides negative gamma to offset the positive gamma, and the combination of selling puts (positive delta) and selling stock (negative delta) can be balanced to maintain delta neutrality.