Strayer fin534 discussions week 5
Creating a risk-free hedge portfolio using stocks and options can be achieved by utilizing various strategies such as buying put options, selling call options, or writing covered calls. Each of these methods involves the use of derivatives that allow investors to protect their portfolios against market volatility while at the same time taking advantage of potential capital gains.
One strategy is to purchase put options on stocks that are held in an investor’s portfolio. Put options provide downside protection as they give the holder the right (but not the obligation) to sell shares at a specified price. For example, if you own 100 shares of stock XYZ and buy a put option with a strike price of $50 per share then you would have the right to sell those shares for $50 even if their current market price falls below this level.
A second approach is selling call options which gives you income from premium payments but also exposes your portfolio to potentially unlimited losses if prices rise above the strike price. For instance, if you sold a call option on stock XYZ with a strike price of $60 then you would receive income from premium payments but could lose money if prices rose significantly above this level since holders of call options have no limit on their potential gains.
Finally, another method for creating a hedge portfolio is writing covered calls where an investor sells someone else’s rights to purchase underlying assets at predetermined prices within specified time frames. This technique allows investors who already own stocks or other assets to generate additional income by agreeing to sell them in exchange for an upfront payment and/or other benefits like tax treatment advantages or margin account credits.