Question

You have $100,000 to invest. Your investment strategy must include at least two options on a stock of your choice (all options must be on the same stock). They can be either calls or puts or both, with any strike price, as long as all options in your portfolio expire on the same date, and that date is no earlier than June 2020. You can build spreads, straddles, collars, etc. – your choice. Buy them or write them – your choice. Buy at the ask and sell at the bid. Make sure you pick liquid options, i.e. options that actually trade daily with substantial trading volume. Whatever positions you take, assume you will liquidate them on April 20, 2020. Design an investment strategy that would pay off in the event that you believe is the most likely outcome of the stock. For example, your stock is having the earnings call soon. If you believe that the earnings call will result in a positive surprise and the stock price will increase, you should design an option strategy that will pay off if the stock price goes up. Or if you think that the direction of the surprise is hard to predict but you expect a significant surprise either way, design an option strategy that will pay off in the event of high volatility. Etc., whichever outcome you bet on, design an option strategy that will pay off in that case. When designing your strategy, think about maximizing return while minimizing risk.

Answer 1

Considering my view is that the stock price will be volatile. Means it will move in any direction and the volatility will increase.

I will create long straddle in this case. Where I will buy Call and Put at the same strike say the price of the stock.

During high volatilty the VIX increases. This leads to rise in the option value. So say the price of the stock falls rapidly, then the put option will be deep in the money and you will start to gain rapidly on the put and your call will fall but not so much because VIX will be high.