Explanation:
If the option position has a negative gamma, the trader must have a short option position. This means he needs to buy options to create a gamma-neutral position. Gamma per contract = 1.50 × 100 = 150. Call option contracts to buy = 1,200 / 150 = 8 contracts. Buying 8 contracts, however, increases the portfolio delta by 8 × (0.60 × 100) = 480. To reduce the delta, we need to sell 480 shares of the underlying asset.
(Book 4, Module 62.3, LO 62.f)
Ultimate access to all questions.
Question 37
A trader is managing an option position that has a negative gamma of 1,200 and is currently delta neutral. He has identified a traded call option that has a gamma of 1.50 and a delta of 0.60. Assume each option contract is written on 100 shares of the underlying asset, and the option's delta and gamma are quoted per share. In order to create both a gamma-neutral and delta-neutral position, what strategy should be adopted?
A
Buy 8 call option contracts and sell 480 shares of the underlying asset.
B
Sell 8 call option contracts and buy 480 shares of the underlying asset.
C
Buy 8 call option contracts and buy 480 shares of the underlying asset.
D
Sell 8 call option contracts and sell 480 shares of the underlying asset.
No comments yet.