An option trader sells 2 contracts of a put option on a stock. Each contract is

Question

An option trader sells 2 contracts of a put option on a stock. Each contract is on 100 shares of the stock. The delta of the put option is -0.3. If the trader delta-hedges his position, what should he do? Buy 30 shares of stock Buy 60 shares of stock Short sell 30 shares of stock Short sell 60 shares of stock Do nothing An option trader buys 2 contracts of a call option on a stock. Each contract is on 100 shares of the stock. The delta of the call option is 0.3. If the trader delta-hedges his position, what should he do? Buy 30 shares of stock Buy 60 shares of stock Short sell 30 shares of stock Short sell 60 shares of stock Do nothing

Explanation / Answer

3.The negative delta of a put option indicates that for a decline of put option value by each $1 the value of put option would increase by $0.30. So inorder to hedge against his position with negative delta value a trader should buy 60 shares of stock with 30 shares of stock in each contract.

4. The positive delta of a call option indicates that for an increase in value of option by $1 there will be an increase in value by $0.30. So inorder to hedge against his position with delta value a trader should shortsell 60 shares of stock with 30 shares of stock in each contract.

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