You own 1,500 shares of ABC stock that is currently priced at $27 a share.Given this price,the option delta for a $25 call option on this stock is .724.How many $25 call options do you need to hedge against a -$1 change in the price of the stock?
A)buy 1,500 options
B)buy 2,482 options
C)write 1,500 options
D)write 2,072 options
E)write 3,295 options

Question

Quizplus · Accepted Answer

To hedge against a -$1 change in the stock price, we need to determine how many options we need to own or write to offset the potential loss/gain.

First, we need to determine the total value of our stock holdings:

1,500 shares x $27/share = $40,500

Next, we need to determine how many options with a delta of .724 we need to offset a -$1 change in the stock price:

($1 change) / (.724 delta) = 1.38

This calculation tells us that for every $1 change in the stock price, we need 1.38 options to offset the potential loss/gain.

Therefore, to hedge against a -$1 change in the stock price, we need:

1.38 options x 1,500 shares = 2,072 options

Hence, the correct answer is D) write 2,072 options.

You Own 1,500 Shares of ABC Stock That Is Currently