FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"
A stock trades at 80. A trader is short 20,000 calls with delta 0.40 and long 5,000 puts on the same stock with delta -0.30. Each contract covers one share. What stock trade makes the portfolio delta-neutral?
Buy 9,500 shares. The short calls contribute -8,000 delta and the long puts add -1,500, for a total of -9,500. A long stock position of 9,500 shares offsets this and brings portfolio delta to zero.
- ABuy 9,500 sharesCorrect
- BSell 9,500 shares
- CBuy 6,500 shares
- DBuy 8,000 shares
Explanation
Short calls delta: -20,000 x 0.40 = -8,000. Long puts: 5,000 x (-0.30) = -1,500. Total = -9,500, so buy 9,500 shares to offset. Ignoring the puts gives 8,000; subtracting the put delta gives 6,500.
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