You own 1,800 shares of Textile stock, which is currently, valued at $62 a share. The $65 put has a premium of $4.26 and a put delta of −.60. What position should you take in $65 put contracts to hedge your stock against a $1 decrease in price?
A)buy 3 contracts
B)buy 30 contracts
C)buy 300 contracts
D)write 3 contracts
E)write 30 contracts

Question

Quizplus · Accepted Answer

To hedge against a $1 decrease in price, we need to protect 1,800 shares x $1 = $1,800 worth of value. Each put option protects $6,500 worth of stock (100 shares x $65 strike price), so we need to protect $1,800 / $6,500 = 0.277 contracts, or roughly 30 contracts. The put delta of -.60 indicates that for every $1 decrease in the stock price, the put option will increase in value by 60 cents. Buying 30 contracts with a delta of -.60 will give us protection equal to 30 x 100 x .60 = $1,800, which is the amount we need to protect.

You Own 1,800 Shares of Textile Stock, Which Is Currently