Index Future & Delta of Option

[[email protected]]

Hi David,

From 2006 past year question:
-Portfolio Insurance Strategy
-Portfolio of stocks not paying any dividends
-Expectation: Assets price will decrease

Answer: Sell an amount of index future equivalent to the change in the put delta x original portfolio value

Clarification seek:
1) the put delta refers to N(d1)-1 --- right?
2) if N(d1)-1 = 0.5, original portfolio value is $1million, value of future to be sold is $1,000,000 X 0.5 = $500,000

From the understanding from the above answer, will the following finding is right?
Background:
-Objective: to profit from asset price direction without changing the underlying assets
- Expectation: Assets price will increase
- Portfolio of stocks not paying any dividends

Implementation:
-Buy an amount of index future equivalent to the change in the call delta (N(d1)) multiply with original portfolio value
-if N(d1)-1 = 0.5, original portfolio value is $1million, value of future to be purchased is $1,000,000 X 0.5 = $500,000

Regards
Learning

 

[David Harper CFA FRM]

Hi Learning,

Can you refer to this thread: http://forum.bionicturtle.com/viewthread/2047/
..because it discusses your first query and, you'll note, asja basically asked your second query

I would only add:
yes, agreed: Put delta N(d) - 1
but note that N(d1) is the call option delta and it must always be between 0 < N(d1) < 1
such that put delta must always be between -1.0 < N(d1) - 1 < 0; i.e,. put (percentage) delta is always negative

Thanks, David