Question

Data related to 3-month European Options on HG Option Н J K Type of option Call Call Put Put $38.00 $46.00 $36.00 Exercise Price $38.00 0.30 0.64 N(d) 0.56 0.56 0.21 N(d2) 0.45 0.45 0.53

1. Based on the data given, which of the following options is most likely to exhibit the largest gamma measure?

A. Option I

B. Option J

C. Option K

D. None of the answers

2. If Wayne uses option K contract to hedge its position and HG’s share price subsequently dropped from $38 to $36, Wayne would most likely need to take the following action to maintain the same hedged position:

A. Sell options because the put delta has become less negative

B. Sell options because the put delta has become more negative

C. Buy options because the put delta has become more negative

D. Buy options because the put delta has become less negative

Answer 1

1. Answer: Option J

Reason - Using the black Scholes model , we see that the option J having the higher strike Price will have high delta , due to which the gamma is also high.

2. A) Sell options because the put delta has become less negative.

Reason- in order to hedge with the decrease in stock price, in the case of put option we need to sell the stock . As the stick and exercise price is dame the delta will be less negative because the optuin is at the money.