An option trader creates a delta-hedged covered call (or “bu…
An option trader creates a delta-hedged covered call (or “buy-write”) in order to short 200 call options on a stock with a spot price of $200. The stock’s log-return has a volatility of 50 percent per year. The trader chooses to short the OOM calls with a strike price of $230 and five days until expiration (assuming 252 trading days in a year). The appropriate risk-free rate is 4 percent per year. If the price of the underlying were to immediately fall by $20, approximately what gain or loss would the trader experience? Use delta and gamma to calculate the approximation. Enter your answer as a number of dollars, rounded to the nearest $0.0001. Enter gains as positive amounts and losses as negative amounts.