1. Case & Hedging Examples

2. Delta – Neutral Consider our strategy of a long Straddle: Consider our strategy of a long Straddle: A long Put and a long Call, both at the same exercise price.A long Put and a long Call, both at the same exercise price. What we are interested in is the Stock price movement, either way, and with symmetric returns. What we are interested in is the Stock price movement, either way, and with symmetric returns.

3. Case: Pine Street Capital Hedge Fund (HF) vs Mutual Fund (MF) Hedge Fund (HF) vs Mutual Fund (MF) “Market-Neutral”/Positive-Alpha “Market-Neutral”/Positive-Alpha “Market-Neutral” as a Simple Hedge: “Market-Neutral” as a Simple Hedge: Short the “Market”Short the “Market” Put the “Market”Put the “Market”

4. Straddle Example Intel at $20, with riskless rate at 3% and time to maturity of 3 months. Volatility for Intel is 35%. Intel at $20, with riskless rate at 3% and time to maturity of 3 months. Volatility for Intel is 35%. Calls (w/ X=20) at $1.47 Calls (w/ X=20) at $1.47 Puts (w/ X=20) at $1.32 Puts (w/ X=20) at $1.32

5. Straddle Example Buy 10 calls and 10 puts Buy 10 calls and 10 puts Cost = (10 * $1.47 * 100) + (10 * $1.32 * 100)Cost = (10 * $1.47 * 100) + (10 * $1.32 * 100) Cost = 2790Cost = 2790

6. Straddle Example Intel  $22, C = $2.78, P = $0.63 Intel  $22, C = $2.78, P = $0.63 Value = (10 * 2.78 * 100) + (10 *.63 * 100)Value = (10 * 2.78 * 100) + (10 *.63 * 100) Value = $3410Value = $3410 Gain = $620Gain = $620 Intel  $18, C = $0.59, P = $2.45 Intel  $18, C = $0.59, P = $2.45 Value = (10 * 0.59 * 100) + (10 * 2.45 * 100)Value = (10 * 0.59 * 100) + (10 * 2.45 * 100) Value = $3040Value = $3040 Gain = $250Gain = $250 More Gain to upside so actually BULLISH! More Gain to upside so actually BULLISH!

7. Delta - Neutral Delta of Call is 0.5519 Delta of Call is 0.5519 Delta of Put is -0.4481 Delta of Put is -0.4481 Note: Position Delta = Note: Position Delta = (10*100*.5519) + (10*100* -0.4481) = +103.72  BULLISH! Delta Ratio is: Delta Ratio is: 0.4481 / 0.5519 = 0.812 0.4481 / 0.5519 = 0.812 which means we will need.812 calls to each put (or 8 calls and 10 puts).

8. Delta - Neutral Straddle Example Buy 8 calls and 10 puts Buy 8 calls and 10 puts Cost = (8 * $1.47 * 100) + (10 * $1.32 * 100)Cost = (8 * $1.47 * 100) + (10 * $1.32 * 100) Cost = 2496Cost = 2496 Note: Position Delta = (8*100*.5519) + (10*100* -0.4481) = -6.65  Roughly Neutral

9. Delta - Neutral Straddle Example Intel  $22, C = $2.78, P = $0.63 Intel  $22, C = $2.78, P = $0.63 Value = (8 * 2.78 * 100) + (10 *.63 * 100)Value = (8 * 2.78 * 100) + (10 *.63 * 100) Value = $2854Value = $2854 Gain = $358Gain = $358 Intel  $18, C = $0.59, P = $2.45 Intel  $18, C = $0.59, P = $2.45 Value = (8 * 0.59 * 100) + (10 * 2.45 * 100)Value = (8 * 0.59 * 100) + (10 * 2.45 * 100) Value = $2922Value = $2922 Gain = $426Gain = $426 Now Gains roughly symmetric; delta- neutral Now Gains roughly symmetric; delta- neutral