I don’t quite understand the interpretation to the sign of ‘h’ in the hedge ratio.
I mean we know it intuitively that hedge would mean taking an opposite position. We would do so even with a positive ‘h’ on call option.
What am I missing here?
h is the number of shares of the underlying that you need to offset a position on an option. (option that corresponds to that hedge ratio)
I understand that. But there’s a connotation to + and - h which I’m questioning.
Yea call option h will be +ve and put option h will be -ve.
if you are long a call then to offset that position you need to short h number of stocks aka H = -hS + c
well this is strictly about the hedged portfolio.