You are a portfolio manager who uses options positions to customize the risk pro

Question

You are a portfolio manager who uses options positions to customize the risk profile of your clients. In each case, what strategy is best given your client's objective? a. . Performance to date: Up 16%. Client objective: Earn at least 15% Your scenario: Good chance of large stock price gains or large losses between now and end of year. Buy a call option Write a call option Long straddle Long bullish spread Short straddle Short bullish spread Performance to date: Up 16%. . . · Client objective: Earn at least 15% with limited losses Your scenario: Good chance of large stock price losses between now and end of year. Short put options Long put options Short call options Long call options

Explanation / Answer

a. Scenario : Good chance of large price gains or large losses between now and end of year.

Answer is long straddle.

A long straddle is a combination of buying a call and buying a put, both with the same strike price and expiration. Together, they produce a position that should profit if the stock makes a big move either up or down.

b. Scenario : Good chance of large stock price losses between now and end of year.

Best strategy is long put options.

A long put is an options strategy in which a put option is purchased as a speculative play on a downturn in the price of the underlying equity or index.

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