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? . . 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% b. . 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) Long straddle is a position in which an investor buys both call and put options at the current market price, expecting a large move in either direction.

As the investor expects large gains or losses from the stock, he can select long straddle position to benefit from the move.

b) Put option makes a payoff when the stock price declines. As the investor expects the stock to decline, a long put option will be the best scenario.

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