You are long a portfolio of vanilla call options. Which of the following will help you hedge away your convexity (gamma)?
A) Buying a portfolio of in-the-money vanilla put options.
B) Buying a portfolio of out-of-the money vanilla put options.
C) Buying a portfolio of in-the-money cash-or-nothing put options.
D) Buying a portfolio of out-of-the money cash-or-nothing put options.

Question

Quizplus · Accepted Answer

Buying a portfolio of in-the-money cash-or-nothing put options can help hedge gamma because these options have significant gamma themselves, which can offset the gamma of the call options.

You Are Long a Portfolio of Vanilla Call Options