Question

Steve Smith holds a diversified share portfolio worth approximately $200,000 that tracks the performance of the ASX 200 Total Return index. Due to a recent market event, Steve is becoming increasingly concerned about market volatility affecting the short-term performance of his portfolio. Steve has generated significant capital gains associated with the growth of his investment over time and is reluctant to liquidate the portfolio, and thus wishes to avoid a large capital gains tax bill from the Australian Taxation Office (ATO) this financial year. To allay Steve’s concerns, his portfolio manager has suggested that he could consider using financial derivatives (e.g., equity options) and alternative asset classes to help protect against downside price risk. Steve is positively disposed to these suggestions. As Steve’s portfolio manager, he has asked you to:

a) Identify and discuss two (2) relevant equity option strategies. 

b) Identify and discuss two (2) alternative asset classes. 

Answer 1

A) Steve Smith can use two type of equity Option strategies-

 

I. protective put strategy is one of the strategies which can be adopted by him and he can buy out the put option in order to protect from down side of the portfolio.

 

II. He can also look to short the market index futures as he can also look to short the stock futures of those stocks which has been held by him in the portfolio.

 

B) Two alternative asset classes are as follows-

 

I. He can look to invest through real estate sector because real estate sector will be providing him with adequate investment opportunities in order to invest in the infrastructure of the economy.

 

II. He can also look to invest into the digital currency and the cryptocurrencies which are like Bitcoin and litecoin and these are having a potential of gaining on the upside as these are next era currencies .

A) Steve Smith can use two type of equity Option strategies-

 

I. protective put strategy is one of the strategies which can be adopted by him and he can buy out the put option in order to protect from down side of the portfolio.