Explanation:
Since the current position is short gamma, the action that must be taken is to go long the option in the ratio of the current gamma exposure to the gamma of the instrument to be used to create the gamma-neutral position (5,000 / 2 = 2,500). However, this will change the delta of the portfolio from zero to (2,500 × 0.7) = 1,750. This means that 1,750 of the underlying stock position will need to be sold to maintain both gamma and delta neutrality.
(Book 4, Module 62.3, LO 62.f)
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Question 73
An existing option short position is delta-neutral, but has a -5,000 gamma exposure. An option is available that has a gamma of 2 and a delta of 0.7. What actions should be taken to create a gamma-neutral position that will remain delta-neutral?
A
Go long 2,500 options and sell 1,750 shares of the underlying stock.
B
Go long 2,500 options and buy 1,750 shares of the underlying stock.
C
Go long 10,000 options and sell 7,000 shares of the underlying stock.
D
Go long 10,000 options and buy 7,000 shares of the underlying stock.
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