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Which of the following strategies has a Positive Gamma in investment portfolios?
Short stock and long put
Long stock and long put
Short stock and short call
Long call and long stock
The correct answer is: Long stock and long put
A strategy that exhibits positive gamma means that the portfolio's delta moves in the same direction as the underlying asset's price movement, leading to increasing sensitivity to changes in the asset's price. In the context of an investment portfolio, this characteristic is typically found in positions that benefit from volatility and move in accordance with price changes. In the scenario presented, holding a long stock position inherently means that the position will gain value as the stock increases in price, directly increasing the delta. By also adding a long put option, the investor not only has a long position providing capital gains but also has the protection that comes with the put, while still maintaining a positive response to asset price movements. This dynamic creates a portfolio that has positive gamma because the additional long put amplifies the response as the underlying stock price increases, enhancing the positive Delta. Other strategies listed either involve shorts or combinations that do not result in a positive correlation with the underlying's movement in the same way or do not utilize both long stock and options, which are essential for maintaining a positive gamma.