Question

"Consider the following 4 options on AAPL: (a) 1-year 25-delta call, (b) 1-year 25-delta put, (c) 2-year 50-delta call, (d) 2-year 60-delta put. If we are long 1 millionn contracts on each of these options and want to neutralize the delta of each option position separately with the underlying stock, which of the 4 option contracts needs the most short stock position to neutralize its delta?" а Oo oo с

Answer 1

9 . We have been given given u options: 25-delta call a) 1 year b) Iyear 25-delta put c) 2 year 60 delta put 50-delta call d) 2 year we ane one by long 1 million contract on each of these options. & want to neutralize the delta. Which of the 4 eptions needs the most short stock position to neatralize its delta. soli As we need Duet = 0 Seeing every option a) 1 year 25 delta call i.e. call with a=0.25 0.25 X 1 million Total long contracts = 0.25 million Now, we know a stock = 1. We need, 0.25 million stock to short to neuttige the I year delta b) I year 25-delta put ie. 1 year put with A = -0.25 Total long contracts -0.25 X 1 million = -0.25 million So, here we can't short to neutralize the delta, as go long on stock to neutralize the delta Therefore, this option is eliminated. we need to CSscanned with CamScanner

50-delta call e) 2 year ie. 2 year call with A=0.5 20.5 million :.Total long contracts 0-5X 1 million Now, we know Astock = 1 . we need 0.5 million stock to shoot to neutralize the della. d) 2 year 60-delta put ie long 2 year put with A = -0.6 :. Total contracts -0.681 million =-0.6 million So, here we can't short the stock to neutralize because in put buying we need stock buying to neutralize the delta So, this option is eliminated. Now, comparing option a) & e) c) has most stocks to short to neutralize the delta. And (Option () CScanned with CamScanner

Proper solution is solved.