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An investor has an option portfolio composed of 5,000 identical short call options. The call option’s...

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Finance

An investor has an option portfolio composed of 5,000 identicalshort call options. The call option’s delta is 0.4.

  1. What does it mean intuitively that the delta is 0.4?
  2. How can the portfolio be made delta-neutral?
  3. How will the delta-neutral portfolio’s value change if there isa small (e.g. 0.1%) upward movement in the stock price?
  4. Will the delta-neutral portfolio’s value change if there is alarge (e.g. 10%) upward movement in the stock price? If no, whynot. If yes, what hedge could protect against the change in theportfolio’s value?

Answer & Explanation Solved by verified expert
4.0 Ratings (671 Votes)
a Intuitively it means that for every 1 change in the price of the underlying stock the price of the call option will change by 04 b The portfolio can be made deltaneutral by buying a quantity of the underlying stock which would have a total delta equal to the total delta of the short    See Answer
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Transcribed Image Text

An investor has an option portfolio composed of 5,000 identicalshort call options. The call option’s delta is 0.4.What does it mean intuitively that the delta is 0.4?How can the portfolio be made delta-neutral?How will the delta-neutral portfolio’s value change if there isa small (e.g. 0.1%) upward movement in the stock price?Will the delta-neutral portfolio’s value change if there is alarge (e.g. 10%) upward movement in the stock price? If no, whynot. If yes, what hedge could protect against the change in theportfolio’s value?

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