Question

"Which one of the following 4 long option combinations leads to a delta-neutral position: (a) 1-year 25-delta call + 1-year 75-delta call, (b) 1-year 25-delta call + 2-year 25-delta put, (c) 2-year 75-delta call + 2-year 25-delta put, (d) 1-year 25-delta call + 1-year 75-delta put"

Answer 1

For a delta neutral position, Delta of overall portfolio should be negative.

Option a is not correct as When two call are purchased with positive delta, delta of the portfolio increases.

Option b is correct as delta of call is +25 and delta of put is -25. So, overall delta of the portfolio is 0

option c is not correct as overall delta of this position is +75 - 25 = +50

Similarly, Option d is not correct as overall delta of the position is +25 - 75 = -50.

Only option b is correct.