Explanation:
First, a positive gamma means we are long the options. To hedge the positive gamma, we will need to sell options. We could achieve this gamma hedge by selling either calls or puts. However, the effect on delta is different in selling calls and puts.
If we sell call options, we create a negative delta, which would mean we need to buy the underlying to keep a delta-neutral position.
If we sell put options, we create a positive delta, which means we need to sell the underlying to keep a delta-neutral position.
(Book 4, Module 62.3, LO 62.f)
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Question 12
A portfolio of stock Q and options on stock Q has a positive gamma and is delta neutral. Which of the following actions will make the portfolio delta neutral and gamma neutral?
A
Sell call options on stock Q and buy stock Q.
B
Buy call options on stock Q and sell stock Q.
C
Sell put options on stock Q and buy stock Q.
D
Buy put options on stock Q and buy stock Q.
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