Answer-first summary for fast verification
Answer: A portfolio with a short position in the 1-month and a long position in the 4-month will have positive vega and negative gamma.
C is correct. Although gamma is similar to vega in that it is greatest for an option that is at-the-money and approaches zero as the option moves deep-in-the-money or deep-out-of-the-money, one important difference is that while vega increases as the time to maturity increases, gamma decreases. Since the 1-month option has a lower vega and a higher gamma than the 4-month option, a portfolio with a short position in the 1-month and a long position in the 4-month will have positive vega and negative gamma. Adding this to the original portfolio would reduce the gamma and increase the vega of the original portfolio. A is incorrect. This would increase both gamma and vega. B is incorrect. This would increase gamma and reduce vega. D is incorrect. This would reduce both gamma and vega.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
No comments yet.
Q-59. Although gamma is similar to vega in that it is greatest for an option that is at-the-money and approaches zero as the option moves deep-in-the-money or deep-out-of-the-money, one important difference is that while vega increases as the time to maturity increases, gamma decreases. Since the 1-month option has a lower vega and a higher gamma than the 4-month option, a portfolio with a short position in the 1-month and a long position in the 4-month will have positive vega and negative gamma. Adding this to the original portfolio would reduce the gamma and increase the vega of the original portfolio.
A
This would increase both gamma and vega.
B
This would increase gamma and reduce vega.
C
A portfolio with a short position in the 1-month and a long position in the 4-month will have positive vega and negative gamma.
D
This would reduce both gamma and vega.