You are long a portfolio of vanilla call options. Which of the following will help you hedge away your theta risk?
A) Buying a portfolio of in-the-money cash-or-nothing call options.
B) Buying a portfolio of out-of-the money cash-or-nothing call options.
C) Buying a portfolio of in-the-money vanilla call options.
D) Buying a portfolio of out-of-the money vanilla call options.

Question

Quizplus · Accepted Answer

Buying a portfolio of in-the-money cash-or-nothing call options will help hedge away theta risk because the theta of a cash-or-nothing call option is positive, which means that the value of the option will increase as time passes. This will offset the negative theta of the vanilla call options in the portfolio, thereby reducing the overall theta risk.

You Are Long a Portfolio of Vanilla Call Options