Michael Stevens Option Strategy Essay examples

4460 WordsMar 24, 201218 Pages
Introduction Michael Stevens is a relatively new investor struggling to maintain profits in an uncertain economy. Recent conflicts and conflicting reports have left the Canadian Market muddled and somewhat divided. Michael capitalized on recent volatility in the market and has gained some unrealized profits. He sees a bullish economy returning in the near future but would like to ensure that his profits are maintained even through minor volatility for the next six months. He plans to do this through investing in options and is considering several different strategies. 1. Assessment of the Six-Month Outlook for the Market Only four years prior to Michael’s considerations, there was a significant market crash lowering the average value of…show more content…
This strategy is generally used to protect unrealized profits investors have made. The index is usually chosen after a correlation has been observed. The index must have consistent movement or a high beta with the portfolio for the strategy to be effective. Index puts work no differently than regular puts, they limit downside and they similarly have American and European style options. Similar to regular puts an increase in volatility has a positive effect on the price and as time to expiration shrinks the value also drops. d) Writing an index call is very similar to writing a stock call except the underlying asset is a basket of stocks that are grouped from particular sectors or indices. Similar to buying index puts, an investor should pick an index that has correlated movements with their portfolio or else the strategy will not be effective. Writing index calls is most commonly utilized when an investor is bullish on an underlying stock or portfolio but would like to provide a little protection in case of minimal volatility or to gain some extra income. The main difference between stock and index options is that index options are most commonly used as protection for a varied portfolio. It is crucial that a correlation between the portfolio and the index is established prior to investment. 3. Black-Scholes Model – The Implied Volatility The implied volatility of an option can be derived if one believes that the market is pricing the
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