Question

Please help me to respond to the following questions while elaborating on your insight and providing external support ideas.

You are managing a separate portfolio dedicated to your retirement income. You do not wish to take excessive risk, and would prefer to limit the downside. What common option structure would suffice and how would you implement this structure to protect the portfolio’s value? A bullish call spread is bullish on direction. Is it also bullish on volatility? What is the volatility view implied by a long horizontal call spread? What about a short horizontal put spread?

Answer 1

A bull spread involves buying call option at specific strike price and also selling call option with same maturity but of higher strike price. This strategy is used when a moderate rise in price of underlying security is expected, Thus it does not bet on volatility

Horizontal spread involves buying and selling of two option of same type having same maturity but different expiry dates. This strategy is used to profit from a change in price differece as security move closer to maturity. This strategy is often used when there is neutral view on underlying security, If there is too much movement in one direction then it will result in loss

Thus volitility will rersult in loss

Another usefull strategy is covered call. here call option of higher strike price is sold. Thus hedging against potential fall in prices of underlying security