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NEW QUESTION: 1
The theta of a delta neutral options position is large and positive. What can we say about the gamma of the position?
A. The gamma must be large and negative
B. The gamma must be small and negative
C. The gamma must be large and positive
D. The gamma must be small and positive
The relationship between the value of an option, and its delta, gamma and theta is given by rV = + rS +
0.5(S)2, where V is the value of the option, r the risk-free rate, S the spot price of the underlying, and , & are the respective Greeks.
For a delta neutral portfolio, = 0 and this equation reduces to rV = + 0.5(S)2. Now rV is generally a small number, which means that if is large and positive, must be large and negative to offset that. Therefore Choice
'b' is the correct answer.