A call option on a stock has a delta of 0.3 . A trader has sold 1,000 options. What position should the trader take to hedge the position?
A. Sell 300 shares
B. Buy 300 shares
C. Sell 700 shares
D. Buy 700 shares
B
When the stock price increases by a small amount, the option price increases by 30% of this amount. The trader therefore has a hedged position if he or she buys 300 shares. For small changes the gain or loss on the stock position is equal and opposite to the loss or gain on the option position.
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