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Curtin University - FINANCE INVE3000 An investor has a portfolio consisting of one European vanilla option only
Curtin University - FINANCE INVE3000
An investor has a portfolio consisting of one European vanilla option only. The portfolio has a negative delta and a negative gamma. What is the option position in the portfolio?
-
- Long Call option
- Long Put option
- Short Call option
- Short Put option
- It is impossible to have negative delta and negative gamma from a single European vanilla option.
Expert Solution
Answer:
c ) Short Call option
Step-by-Step explanation
In European Vanilla option, it is observed that:
Negative delta implies that both the underlying, as well as the option value move in the opposite directions. Thus, the long puts and the short calls face negative deltas.
Negative gamma implies that delta rises with a fall in the price. Thus, the short put and short calls face negative gammas.
Thus, out of the various options mentioned above, only the short calls option will be available in the portfolio. Hence, the right answer is (C).
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