Question

dav/pic-1510314-ut-content-rid-148748111/courses/D2930-10315/HW1%283%29.pdf 26. You are a portfolio manager who uses options positions to customize the risk profile of your clients. In cach case, what strategy is best given your client's objective? a. Choose one of the following strategies and explain briefly Performance to date: up 16% Client objective: eam at least 15% Your scenario: good chance of large gains or large losses between now and end of year Strategies i. Long straddle ii. Long bullish spread iii. Short straddle b. Choose one of the following strategies and explain briefly • Performance to date: up 16% Client objective: eam at least 15% Your scenario: good chance of large losses between now and end of year Strategies Long put option ii. Write call option iii. Long call option

Answer 1

a]

(ii) is appropriate.

The client' objective has already been achieved. A long bullish spread has a low cost, and will result in small profits or small losses if the market moves by a large amount as expected.

A long straddle is not appropriate because if the market does not make a large move as expected, all the premium paid for buying the straddle will be lost, which can be quite significant.

A short straddle is not appropriate because if the market makes a large move as expected, the losses can be very high, and potentially unlimited.

b]

(i) long put option is appropriate. The client' objective has already been achieved. A long put option protects the profits in case of a large loss between now and the end of year.

Writing a call option is not appropriate because if the market moves in the opposite direction, i.e. rises, the losses on the call option can be very high, and potentially unlimited.

Long call option is not appropriate because it only results in a profit if the market gains, whereas if the market falls as expected, the premium on the call option will be lost.