Explanation:
The delta of a call option that is deep in-the-money is close to 1. The addition of the 2,500 long options to bring about gamma neutrality disturbed the original delta neutral position of the portfolio. Since 2,500 options have been added, (2,500)(1.0) = 2,500 shares of the underlying must be sold to restore delta neutrality to the portfolio. Note that answer A could be correct only if the options were at-the-money where delta is 0.5.
(Book 4, Module 62.3, LO 62.f)
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Question 43
If it is necessary to be long 2,500 deep-in-the-money call options in order to create a gamma-neutral position, which of the following actions would best restore the original delta-neutral position after the addition of the options?
A
Sell 1,250 shares of the underlying asset.
B
Buy 1,250 shares of the underlying asset.
C
Sell 2,500 shares of the underlying asset.
D
Buy 2,500 shares of the underlying asset.
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