A position in options on a particular stock has a delta of zero and a gamma of 4.The stock price is 10.Which of the following is the approximate relation between the change in the portfolio value in one day,dP,and the return on the stock,dx
A) dP = 4 times the square of dx
B) dP = 2 times the square of dx
C) dP = 20 times the square of dx
D) dP = 200 times the square of dx

Question

Quizplus · Accepted Answer

If S is the stock price and the change in the stock price is dS,the change in the portfolio value is 0.5×4×(dS)².This is 2S²(dS/S)².dS/S is dx.In this case S=10 so that D is correct.

A Position in Options on a Particular Stock Has a Delta