Question

3.1 Dynamically hedging a short position in a call option:

a. Is guaranteed to save you money

b. Results in a reduced volatility of the gain / loss

c. Is more likely to save you money when the option expires out-of-the-money

3.2 Which statement is correct regarding the delta of a put option?

a. Delta is positive

b. In absolute value, delta < 1

c. Delta doesn’t change with the underlying stock price

d. Delta is higher in absolute value when the put option is out-of-the-money (stock is high)

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

3.1

Shorting of call option:

It means that you are selling a call option and receiving a premium. If the call option expires out of money, you have the benefit of the premium received.

Answer: Is more likely to save you money when the option expires out of money.

3.2
Delta of a put option = change in payoff/change in stock value.

= Pu-Pd/(Us-Ds)

Pu & Pd are payoffs at two different stock price Us & Ds respectively.

As for put option, as the stock value increases the payoff decreases, hence it is mainly negative and
Absolutely less than 1.

Answer: b. absolute value, delta < 1