Answer: Sell short dated options and buy long dated options

## Explanation The portfolio exhibits two key characteristics: 1. **High unfavorable sensitivity to increases in implied volatility** - This means the portfolio has negative vega (vega < 0). When volatility increases, the portfolio loses value. 2. **Significant daily losses with the passage of time** - This means the portfolio has negative theta (theta < 0). As time passes, the portfolio loses value. To hedge this portfolio, we need to: - **Increase vega** (make it more positive) to offset the negative vega exposure - **Increase theta** (make it more positive) to offset the negative theta exposure **Option analysis**: - **Short-dated options**: Have higher theta (time decay works faster) - **Long-dated options**: Have higher vega (more sensitive to volatility changes) **Strategy A: Sell short dated options and buy long dated options** - Selling short-dated options gives positive theta (benefits from time decay) - Buying long-dated options gives positive vega (benefits from volatility increases) - This combination effectively hedges both the negative theta and negative vega exposures **Why other options are incorrect**: - **B**: Would increase negative theta and negative vega - **C**: Would increase negative vega exposure - **D**: Would increase negative theta exposure

Author: LeetQuiz Editorial Team