In order to form a dynamic hedge using stock and calls with a delta of 0.2, an investor could buy 10,000 shares of stock and: A. write 2,000 calls. B. write 50,000 calls. C. buy 50,000 calls.
Each call will increase in price by $0.20 for each $1 increase in the stock price. The hedge ratio is –1/delta or –5. A short position of 50,000 calls will offset the risk of 10,000 shares of stock over the next instant.
