Assume that you wish to form a delta-neutral position by using two options. At the current level of the underlying stock’s price, Option A has a delta of -0.43 and Option B has a delta of 0.33.
a. If you wish to write 800 Option As, determine how many Option Bs should be traded. Also, determine whether the position in Option B should be long or short.
b. Suppose you estimate that if the price of the underlying stock increases by TL1, the delta of Option A becomes -0.42 and the delta of Option B becomes 0.334. In light of this information, estimate the position gamma for the delta-neutral position you formed in part (a).
c. If the underlying stock’s price indeed increases by TL1 and you want to reestablish the delta-neutral position using the underlying stock, determine the number of stocks you would need and the position you would need to take.