options - hedge ratio ( formulas?)

[tigas]

Hey Brave Ones,
This is puzzling me…
CFAI Vol 6 - p.236, Hedge ratio formula for puts is DIFFERENT from the same hedge ratio for PUTS on pafe 240.
they say (page 240) that we have the same positions on put+underlying, so:
n=(P- - P+)/(S+ - S-)
but on page 236…
n=(P+ - P-)/(S+ - S-)
anyone went over this…?
really appreciate all your inputs, as usual.
keep fighting…
tigas

 

[wake2000]

which two of ya’ll, which two of ya’ll going home with tigas

 

[kurupt1]

doesn’t really matter which you use mate, as long as you know if the hedge is long/short

 

[bpdulog]

Haven’t seen the put version, but I’m assuming it’s the same as the call version:
n = (C+ - C-) / (S+ - S-)
n = (P+ - P-) / (S+ - S-)
All you’re doing is measuring delta.

 

[tigas]

Bryan,
That’s what I thought…
but on page 240 (vol 6 CFAI) it starts w/ “…unlike the hedge portfolio for calls…the portfolio for puts…” and then they derive the formula for the hedge ratio, which they maintain the denominator but CHANGE numerator.
then, for “long put+ long underlying”
n=(P- - P+)/(S+ - S-)
and on page 236 they use the “same” as for calls either you go 1) long put+ long underlying or 2) short put+ short underlying
n=(P+ - P-)/(S+ - S-)
I would like to know why they use different formulas
if someone already went over this…
thanks!
tigas

 

[tigas]

Hi again,
can anyone help why has CFAI two different formulas for exactly the same hedge ratio with puts?
CFAI Vol 6 - p.236, Hedge ratio formula for puts is DIFFERENT from the same hedge ratio for PUTS on pafe 240.
they say (page 240) that we have the same positions on put+underlying, so:
n=(P- - P+)/(S+ - S-)
but on page 236…
n=(P+ - P-)/(S+ - S-)
many thanks! keep commitment high Brave ones!
tigas

 

[pfcfaataf]

the 236 formula is delta of put option, whereas 240 formula is hedge ratio (how much S to buy to hedge long put position)
if delta of the option is negative (as is delta of long put) you need to buy underlying to hedge the delta of the put, therefore hedge ration is positive
it may be confusing but it is the same formula in fact