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Describe SEPERATELY how adding an option to a portfolio may increase the the existing risk of...

Describe SEPERATELY how adding an option to a portfolio may increase the the existing risk of the portfolio or may decrease the existing risk of the portfolio.

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Answer #1

There are two types of Options

1) Call Option

2) Put option.

Call option : The Holder of call option will have right to buy the underlying asset at agreed strike Price

Put option: The Holder of put option will have rght to sell the undelying asset at agreed strike price.

Thus Call option can be holded in case of bull market & can restrict the purchase price.

Put option can be holded in case of bear market & can restrict the sale price

Thus having option in portfolio restrict the risk.

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