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 Delta Neutral Hedge Strategy 
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Joined: 01 Mar 2013
Posts: 22
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Little confused on this one.
Given an expected decrease in the underlying stock price (Long Equity Exposure) - What is the most effective delta-neutral hedging strategy.
A) Add put options as put option delta moves closer to 0
B)Add call option as call option delta moves further away from 0
C)add put options to the portfolio as the put option delta moves toward -1
The answer is A, but i guessed C. The explaination for selecting A stipulates: Because the delta of put options is negative, as the option delta moves closer to -1 , the number of options necessary to maintain the hedge falls.
Wouldn’t this imply that we shoud buy Put options as the delta moves closer to -1 if we want it to be most effective?
Or should it be read that you wan’t to buy the options out of the money first in the money to be most effective?
cheers.


07 Jul 2015
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Joined: 01 Mar 2013
Posts: 15
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on reading the question, I would say the answer is something like “sell calls and buy puts, giving you a synthetic bond”.
the answers are a bit wierd…
A) buying puts.. good start. as delta moves to zero means stock price is going up. so you are picking up options cheaply as the price moves in the opposite direction to what you expected.
b) buying calls.. wrong thing to do..”as delta moves away from 0” so calls are going in the money (underlying price is increasing) and you are getting a bigger exposure - wrong answer.
c) add puts .. ok fine.. as delta goes to -1. so options are deep in the money and you are buying them.
..the thing i notice is that all strategies are dynamic. i.e. you are not attempting to hedge the position with a single transaction. so now..
a) buy puts when they are cheap
b) buy puts when they are expensive
b) would only make economic sense if you are selling calls at the same time, so a) is the answer.
I dont like it so much though.


07 Jul 2015
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