You have written a put on a put, where the underlying put is written on a stock index. To delta hedge yourself you can either go the underlying put or the underlying index.
A) short; short.
B) short; long.
C) long; short.
D) long; long.

Question

Quizplus · Accepted Answer

To delta hedge a put on a put, one should take a short position in the underlying put and a long position in the underlying index. This is because the value of the put on a put option will decrease as the value of the underlying index increases, hence the long position. However, the value of the underlying put will decrease as the value of the underlying index increases, hence the short position. Therefore, choice B is the correct answer.

You Have Written a Put on a Put, Where the Underlying