FINA 3720 Study Guide - Quiz Guide: Covered Call, Portfolio Insurance, Mcgraw-Hill Education
Document Summary
Options markets: introduction: options provide numerous opportunities to modify the risk profile of a portfolio. The simplest example of an option strategy that increases risk is investing in an all options" portfolio of at the money options (as illustrated in the text). The leverage provided by options makes this strategy very risky, and potentially very profitable. An example of a risk-reducing options strategy is a protective put strategy. Here, the investor buys a put on an existing stock or portfolio, with exercise price of the put near or somewhat less than the market value of the underlying asset. In the event of a decline in value, the minimum value of the put-plus-stock strategy is the exercise price of the put. As with any insurance purchased to protect the value of an asset, the trade-off an investor faces is the cost of the put versus the protection against a decline in value.
