hard · FRM Part 1 Financial Markets and Products
In the context of Option Greeks and dynamic hedging, why does a delta-neutral portfolio consisting of short call options and long shares of the underlying stock typically realize losses during a large, rapid market move in either direction?
- The theta of the short call position is negative, which steadily erodes portfolio value as time passes.
- The delta of a short call position is always positive in sign, which creates a persistent directional bias.
- The portfolio has positive gamma exposure, which caps potential gains from the long stock position as prices move.
- The portfolio has negative gamma, causing the delta to move against the hedger as the stock price changes.
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