You are an options portfolio mananger. You need to maintain a delta neutral position at all times. You have just traded (hedged) with an interbank counterparty who has sold 66 call option contracts of PBS shares to you. Each contract is based on 1000 shares, and has a delta of 40 % How many additional shares in PBS do you need to trade into the open market to remain delta neutral? (If you need to buy shares, please enter a positive integer, or a negative integer if you need to sell)
Question
You are an options portfolio mananger. You need to maintain a delta neutral position at all times. You have just traded (hedged) with an interbank counterparty who has sold 66 call option contracts of PBS shares to you. Each contract is based on 1000 shares, and has a delta of 40 % How many additional shares in PBS do you need to trade into the open market to remain delta neutral? (If you need to buy shares, please enter a positive integer, or a negative integer if you need to sell)
Solution
To maintain a delta neutral position, you need to offset the delta of the options you've bought.
Here's how you can calculate it:
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First, calculate the total delta of the options. The delta of each option is 40%, or 0.4, and each contract is for 1000 shares. So, the delta for each contract is 0.4 * 1000 = 400.
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Since you have 66 contracts, the total delta of the options is 400 * 66 = 26400.
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To maintain a delta neutral position, you need to offset this by trading the underlying shares. Since the options have a positive delta, you need to trade shares with a negative delta to offset it.
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Therefore, you need to sell 26400 shares in the open market to remain delta neutral. So, the answer is -26400.
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