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

## Explanation To hedge the portfolio's Greeks: **Current Position:** - **Theta = +25,000** (positive theta means the position benefits from time decay) - **Vega = +330,000** (positive vega means the position benefits from increased volatility) - **Gamma = -200** (negative gamma means the position is short gamma, sensitive to large price movements) **Hedging Strategy Analysis:** **Option A: Sell short-term options + sell long-term options** - Selling options gives negative theta (benefits from time decay) - Selling options gives negative vega (benefits from volatility decrease) - Selling options gives positive gamma (opposite to current negative gamma) **Option B: Sell short-term options + buy long-term options** - Selling short-term options: negative theta, negative vega, positive gamma - Buying long-term options: positive theta, positive vega, negative gamma **Matching the Greeks:** - The portfolio needs **negative theta** to offset +25,000 theta - The portfolio needs **negative vega** to offset +330,000 vega - The portfolio needs **positive gamma** to offset -200 gamma **Option B provides the correct combination:** - Selling short-term options gives strong negative theta and negative vega - Buying long-term options gives positive gamma (to offset the negative gamma) - The combination can be balanced to achieve the desired neutralization **Therefore, Option B is correct** because it allows for creating a position with negative theta, negative vega, and positive gamma to offset the current portfolio's positive theta, positive vega, and negative gamma.

Author: LeetQuiz .