1. avatar says

    Hi Sir,

    May I ask about the option dealer part that short call option. Usually as an investor we will buy put option instead, but since you say option dealer traded option (which i think this is what you mean?), then they buy shares to hedge. Can I say that the option dealer actually earn the option premium as a seller from the buyer of the call option and hedge himself using shares, which the transaction fees shall be much cheaper than that of option premium?

    • Profile photo of John Moffat says

      As far as exam questions go, someone owning shares can use call options to hedge against the risk of movements in the share price (and form a delta hedge).

      In practice it is more likely that it will be the option dealer (the person who sells the options) who creates a delta hedge by buying shares. Yes, the will receive a premium when they sell them, but remember that they have the risk of having to pay out to whoever bought them if the purchaser ends up exercising the option.

      • avatar says

        So in practice, the option dealer will pay out to whoever bought them if the share price goes up so that the reason why the option dealer buy shares in case the prices goes up and they can sell the shares, am I right to say that Sir?

      • Profile photo of John Moffat says

        That is correct :-)

        (Although do appreciate that in the exam, for calculations involving a delta hedge then you do it from the shareholders point of view (as in the example in the lecture). It is only in a written part of the question where it could be relevant to mention the above.)

  2. avatar says

    Hi Sir,
    Is it possible to explain me why N(d1) from ex 6 is fixed, when the share price is changing.

    You are saying that Change of option price will change by Change of Share price x N(d1). But should N(d1) change as it is depending on the Share price?

    Will appreciate your response.


  3. avatar says

    Hello Sir

    Thank you for the lectures. I have a question about eg.6 that Martin own only 1000 shares so how he can sell 4080 options, I mean how and when he got that much of call optin rights. Does it mean he can sell any number of options if so how he got that rights for options?. Please give me some explanation.

    Many thanks

    • Profile photo of John Moffat says

      Just as with so many financial instruments, you can buy first and sell later (in which case you make a profit if the price increases) or you can sell first and buy later (in which case you make a profit if the price falls). You do not need to already own any to be able to sell – it simply means that you have to buy at some stage later.
      (The same applies to currency and interest rate futures, as you will see in the later chapters.)

  4. Profile photo of tinashe says

    @IGOLO from the lecture its clear that you would sell a call option say today while the share price is high, implying even the call option would be high, then when the share price fall in that future, its also assumed the call option which you sold while prices were high’s price would fall, then you buy it back. making a profit. However the trick is in how many of the call options do you need to compensate you for the loss in (falling share prices), hence the simplified Delta Hedge!

    It then in example 6 meant martin had to sell 4080 call option which would protect him against the future expectations that prices will fall!

    In hind sight if the prices do indeed go up instead of fall , Martin’s share market value increases, and the call option which he sold at the time 0 when he thought prices will go down becomes expensive to buy back. its a give or take situation. Like insurance for your car. You insure thinking if you get an accident someone replaces your car, however if nothing happens to your car all your life the insurance co gains, but if you indeed smash it its replaced!.

    This is interesting indeed.

    • Profile photo of John Moffat says

      If you own shares and you are worried that the price of the share might fall, then the most sensible thing to do would be to buy a put option (there is no such thing as a pull option :-) ). The put option will give you the right to sell the share at a fixed price. So…..if the share price does fall below that price, then you are protected because you still have the right to sell it at the fixed price.

  5. avatar says

    Hello Sir,

    I love your lectures, really very well explained, so thank you very much.
    I have a question in relation to Delta Hedge, it assumes that only current MV of share changes, but N(d1) is constant. How could it be when we use Current MV of shares in calculations of N(d1), so it should change as well.

    • Profile photo of John Moffat says

      @cara, That is very true, which is why delta hedges need to keep being changed (and this is stated in the lecture).
      That is the reason for all the other Greeks, but you are only expected to know what they measure and you are not expected to be able to calculations with them.

  6. avatar says


    Sir..kindly let me know how he is going to gani by selling call option???if share price is falling…value of call option also falling…..he would have purchased call option at higher price….and by selling it at lower price it wont be loss???


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