Question

How would you delta hedge an ‘at-the-money’ long call option?

A. Go short of the underlying commodity equal to 50% of the size of the option contract

B. Go long of the underlying commodity equal to 50% of the size of the option contract

C. Go long of the underlying commodity equal to the full size of the option contract

D. Go short of the underlying commodity equal to the full size of the option contract

Answer #1

A. Go short of the underlying commodity equal to 50% of the size of the option contract.

Delta measures the risk from a move of the underlying price. Delta hedging is an option strategy which involves reducing the volatility by establishing offsetting position on the underlying. For at the money call option, delta will be approximately 0.5, shich means that if underlying stock moves 1 point, option price will chanve by 0.5 point. So, for a at the money long call option, delta hedging can be achieved by shorting underlying commodity equal to 50% of the size of the option contract.

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