You own 1,000 shares of ABC stock at a price of $50 per share. A put option is priced at $0.56 and has an option delta of -0.1614. The stock price is expected to fall to $49. To hedge your stock portfolio, how many put option contracts you need?
A) Buy 124
B) Buy 62
C) Sell 62
D) Sell 31
E) Undetermined due to insufficient information

Question

Quizplus · Accepted Answer

To hedge your stock portfolio, you need to buy put options with a delta of -1, which would completely offset any losses in the stock price. 
Since the option delta is -0.1614, you would need to buy 1/(-0.1614) = 6.181 option contracts to fully hedge your stock. 
However, since options are typically traded in whole contracts, you would need to round up to the nearest whole number, which is 7. 
Each option contract covers 100 shares, so you would need to buy 7 contracts x 100 shares per contract = 700 put options. 
Therefore, the answer is B, buy 62 option contracts (rounded up from 61.29).

You Own 1,000 Shares of ABC Stock at a Price