The option delta (i.e., hedge ratio) for a call on Ajax stock is 0.7, while the delta for the put on Ajax stock is -0.3… You wish to hedge a portfolio of 100,000 shares of Ajax. Recall that the option delta is the change in option price for a $1 increase in its stock.
1. How many call options will you need to write to hedge your portfolio using the option delta as your theoretical basis, given writing calls is your only hedge mechanism?
2. How many put options will you need to acquire to hedge your portfolio using the option delta as your theoretical basis, given acquiring puts is your only hedge mechanism?
3. For these two strategies for managing risk, do they cover downside risk associated with underlier price volatility?