Option Sensitivity Measures: The “Greeks” (FRM Part 1 2023 – Book 4 – Chapter 16)

*AnalystPrep is a GARP-Approved Exam Preparation Provider for FRM Exams*

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.

[josephchuck]

Professor God bless you! This is exactly the exercise my prof gave me as assessment for my final grade.

[pusetsozacharia]

Your videos are the best for a review - The best!

[sswizzy]

thanks for the videos. Im from Ontario studying finance and they've been very helpful.

[sammalhotra]

at 19:20, you say option is out of the money, but in the example he sold the option, and the price went down, so he's in the money and that is why hedge ratio goes down when Spot price goes down to 195.

[YiLiu-nr]

23:51. the formula of theta put seems wrong. for the 2nd part, should be +rXe^(-rT)*N(-d2), right?

[ahmadhilal]

a very helpful journey with you professor!
Thank you

[guangyanwei]

I've got a question, it is probably obvious but why the delta neutral hedge has to be short term? Why we hedge only with short term options?