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You have just sold a call option on 100 shares of stock. The stock price $74...

You have just sold a call option on 100 shares of stock. The stock price $74 and its volatility is 60% per annum. The strike price of the option is $86 and it matures in 6 months. The risk-free rate is 4% per annum compounded.

A) What position should you take in the stock for delta neutrality?

B) Suppose after you set up the delta-neutral position, the stock price suddenly jumps to 70. Would you buy or sell shares to maintain delta neutrality. Why? Did you gain or lose money or had no gain or loss in your position? Why? You do not need to calculate gain or loss. The explanation is important.

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Answer #1

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

1. Buy 47 shares for delta neutrality.

2. Since its a hedge portfolio, there is no profit or loss.

Since you did not sell any new call options, there is no need to buy any new shares at any stock price to maintain delta neutrality.

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