A portfolio of derivatives on a stock has a delta of 2400 and a gamma of -10.An option on the stock with a delta of 0.5 and a gamma of 0.04 can be traded.What position in the option is necessary to make the portfolio gamma neutral?
A) Long position in 250 options
B) Short position in 250 options
C) Long position in 20 options
D) Short position in 20 options

Question

Quizplus · Accepted Answer

The options must have a gamma of +10 to neutralize the gamma of the portfolio.Each option has a gamma of 0.04.Hence a long position of 10/0.04 = 250 options is required.

A Portfolio of Derivatives on a Stock Has a Delta