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After completing this reading, you should be able to:
- Describe and assess the risks associated with naked and covered option positions.
- Explain how naked and covered option positions generate a stop loss trading strategy.
- Describe delta hedging for an option, forward, and futures contracts.
- Compute the delta of an option.
- Describe the dynamic aspects of delta hedging and distinguish between dynamic hedging and hedge-and-forget strategy.
- Define the delta of a portfolio.
- Define and describe theta, gamma, vega, and rho for option positions.
- Explain how to implement and maintain a delta-neutral and a gamma-neutral position.
- Describe the relationship between delta, theta, gamma, and vega.
- Describe how hedging activities take place in practice, and describe how scenario analysis can be used to formulate expected gains and losses with option positions.
- Describe how portfolio insurance can be created through option instruments and stock index futures.