You own 800 shares of Bradley Co. stock that is currently priced at $33 a share. Given this price, the option delta for a $35 call option on this stock is .66. How many $35 call options do you need to hedge against a −$1 change in the price of the stock?
A)buy 1,212 options
B)buy 1,813 options
C)buy 1,847 options
D)write 1,212 options
E)write 1,847 options

Question

Quizplus · Accepted Answer

To hedge against a $1 decrease in the stock price, you need to establish a delta-neutral position. The delta of .66 means for every $1 change in the stock price, the option's price will change by 66 cents. You own 800 shares, so your current delta is 800 (since the stock's delta is 1). To hedge, you need to offset this with options. The formula is: Number of shares / delta of option = Number of options needed. Thus, 800 / .66 = 1,212.12. Since you can't buy a fraction of an option, you would write (sell) 1,212 options to hedge your position.

You Own 800 Shares of Bradley Co