You own 7,500 shares of GO stock which is currently valued at $47 a share.The $50 put has a premium of $2.50 and a put delta of -.60.What position should you take in $50 put contracts to hedge your stock against a $1 decrease in price?
A)buy 125 contracts
B)buy 1,250 contracts
C)buy 12,500 contracts
D)write 125 contracts
E)write 1,250 contracts

Question

Quizplus · Accepted Answer

To hedge against a $1 decrease in stock price, you need to buy puts. The delta of -0.60 means each put option will gain $0.60 for every $1 decrease in stock price. You own 7,500 shares, so you need a delta of -7,500. Each contract covers 100 shares, so you need 7,500 / (0.60 * 100) = 125 contracts.

You Own 7,500 Shares of GO Stock Which Is Currently