A bank has just sold call options on 500,000 shares of a stock. The strike is $40; the stock price is $40; the risk-free rate is 5%; the volatility is 30%; and they expire in 3 months. The stock does not pay dividends. The bank takes a position in the stock to protect itself from short-term price changes. If the price of the stock jumps to $42 as soon as the bank writes the options and hedges them, what trade will be necessary to maintain the portfolio's insensitivity to price changes?
Group of answer choices:
1. The bank should short buy 21,500 shares.
2. The bank should short 61,500 shares.
3. The bank should buy 21,500 additional shares.
4. The bank should buy 61,500 additional shares.