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FRM Part I · FRM Exam Part I · Option Sensitivity Measures: The "Greeks"

A trader holds a long position in 10,000 European call options on a non-dividend-paying stock. Each call has a delta of 0.55. To make the position delta-neutral using the underlying stock, the trader should:

The trader should sell 5,500 shares. The long calls behave like 5,500 shares of stock (10,000 x 0.55), so shorting that many shares offsets the position's price sensitivity and makes the portfolio delta-neutral.

  1. ASell 5,500 sharesCorrect
  2. BBuy 5,500 shares
  3. CSell 4,500 shares
  4. DBuy 10,000 shares

Explanation

The option position has delta of 10,000 x 0.55 = 5,500 shares equivalent. Offsetting requires a short stock position of 5,500 shares. Buying shares would double the exposure rather than neutralize it.

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