Explanation:
In order to hedge a short call option position, a manager would have to buy enough of the underlying to equal the delta times the number of options sold. In this case, delta = 0.5, so for every two options sold, the manager would have to buy a share of the underlying security. (Stop- loss strategies with call options are designed to limit the losses associated with short option positions. The strategy requires purchasing the underlying asset for a naked call position when the asset rises above the option’s strike price.)
Which of the following choices will effectively hedge a short call option position that exhibits a delta of 0.5?
A
Sell two shares of the underlying for each option sold.
B
Buy two shares of the underlying for each option sold.
C
Sell the number of shares of the underlying equal to one-half the options sold.
D
Buy the number of shares of the underlying equal to one-half the options sold.