Question

An article in the New York Times described how federal prosecutors accused a money manager of swindling his​ friends, family, and other investors out of​ $40 million. The article described the money manager as losing all the funds entrusted to him in “aggressive bearish options trades.”

​Source: Matthew Goldstein and Alexandra​ Stevenson, “Andrew ​Caspersen, Charged in​ $40 Million​ Fraud, Had Gambling​ Addiction, Lawyer Says,” New York Times​, June​ 14, 2016.

A bearish financial investor assumes that a stock will▼(decline/increase) in​ price, while a bullish financial investor assumes a stock will ▼(decline/increase/in price.)

To make these bearish​ trades, was the money manager buying put options or buying call​ options?

A. Put​ options, giving him the right to buy shares of the stock at a fixed price.

B. Put​ options, giving him the right to sell shares of the stock at a fixed price.

C. Call​ options, giving him the right to buy shares of the stock at a fixed price.

D. Call​ options, giving him the right to sell shares of the stock at a fixed price.

Answer 1

A bearish financial investor assumes that a stock will decline in​ price, while a bullish financial investor assumes a stock will increase in price.

A normal bear strategy is used when the trader expects the underlying stock price to decline & he/she wants to bet on it. In such cases he has an estimate of upto which price range the price will decline (lets say X) & by what time the decline will happen. Then the trader purchases put option, giving him the right to sell shares of the stock at a fixed price (higher than X) for a maturity (time by when trader assumes the decline will happen)

Thus option B.