Question

We are in calm financial markets and you think they will remain as such, but your client is risk averse. You are recommending a particular technology company which you think has a great near-term outlook. Your client wants to dabble in options but also wants to own the underlying stock and respects your outlook. What would you recommend they do?

Answer 1

We understand that the client's risk appetite is lower.

Hence we may need to suggest a product that is in combination of the option and the stock, a low risk investment to match his risk appetite.

1. Buy the underlying stock, and also buy a put option:

This would hedge the risk of the underlying stocks crashing , buy the put option, which would compensate any losses made. However this strategy can be used to merely mitigate risk and not be a hedging strategy.

For instance the put option can be for a quantity of stock muhc lower than the underlying stock, thereby losses are partially covered, however if there is a big gain, the gains are also not wiped out by this strategy.

2. In general if there are calm financial outlooks options might not yield money , if there are very topsy turvy times ahead one way to dabble in options would be to have both call and put options on the underlying.

If either market rises, or falls in a big way, either of the options can be exercised resulting in a profit .

Buy and hold strategy with the stock would make more sense if a stable