You are short a put on $A B C$ stock and have delta-hedged yourself using the stock. The delta of the put is $- 0.71$ and the gamma of the put is $+ 0.04$ . If the price of the underlying registers an increase of $0.50, to maintain your delta-hedge, you must
A) Sell 0.04 units of the stock.
B) Buy 0.04 units of the stock.
C) Sell 0.02 units of the stock.
D) Buy 0.02 units of the stock.
E) None of the above.

Question

Quizplus · Accepted Answer

To maintain a delta-neutral position, you adjust your hedge according to the gamma of the option. Since the gamma is +0.04, for a $0.50 increase in the underlying's price, you need to buy 0.02 units of the stock (0.04 gamma * $0.50 = 0.02).

You Are Short a Put On ABCA B CABC Stock and Have Delta-Hedged Yourself Using the Stock

You Are Short a Put On $A B C$ Stock and Have Delta-Hedged Yourself Using the Stock