VRM 16. Option Sensitivity Measures: The “Greeks”

Learning Objectives

1) Describe and assess the risks associated with naked and covered option positions.

2) Describe the use of a stop loss hedging strategy, including its advantages and disadvantages, and explain how this strategy can generate naked and covered option positions.

3) Describe delta hedging for an option.

4) Compute the delta of an option.

5) Describe the dynamic aspects of delta hedging and distinguish between dynamic hedging and hedge-and-forget strategies.

6) Define and calculate the delta of a portfolio.

7) Define and describe theta, gamma, vega, and rho for option positions and calculate the gamma and vega for a portfolio.

8) Explain how to implement and maintain a delta-neutral and a gamma-neutral position.

9) Describe the relationship between delta, theta, gamma, and vega.

10) Describe how to implement portfolio insurance and how this strategy compares with delta hedging.