CFA Level I · CFA Level I Exam · Pricing and Valuation of Options
A trader is long 10,000 shares of a stock and wants to delta hedge by writing call options. Each call covers one share and has a delta of 0.40. The number of call options the trader must sell is closest to:
The trader must sell about 25,000 calls. Each call offsets 0.40 shares of price exposure, so the number of options equals the share position divided by delta: 10,000 / 0.40 = 25,000. Multiplying by delta would give the wrong figure of 4,000.
- A4,000
- B10,000
- C25,000Correct
Explanation
Each short call has delta -0.40 per share. Hedging 10,000 shares requires 10,000 / 0.40 = 25,000 calls. Selling 4,000 multiplies by delta instead of dividing. Selling 10,000 ignores delta.
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