Question

You are working as a portfolio manager in Goldman Sachs. You have been analysing equities and found out that Qualcomm stock price can be extremely volatile in coming months because of political issues. You are going to use options to capitalise on your beliefs. Taking into account that you have a significant portfolio and advanced analytical toolkit, you will:

Select one:

a. Write a put and buy a call with higher strike

b. Buy one call and sell another call with higher strike

c. Write a call and buy a put with lower strike

d. Buy one put and write another put with lower strike

e. Go long in call and put options with the same strike

f. Go short in call and put options with the same strike

g. Go long in call and put options with the different exercise prices

h. Go short in call and put options with the different exercise prices

i. Write a put and buy a call with lower strike

j. Buy one call and sell another call with lower strike

k. Write a call and buy a put with higher strike

l. Buy one put and write another put with higher strike

Answer 1

In this case, the only thing that we expect is that the price can be extremely volatile, we are not making any guess regarding whether the price will go up or down. So we need an options strategy in which we can benefit in both cases whether the price goes up or down.

The right way to do this is to Go long in call and put options with the same strike. This strategy is called a long Straddle. Due to high expected volatility, If the price goes up a lot, our at the money (ATM) call option will become highly profitable and it will more than compensate for the loss due to the long Put option. Vice versa will be true if the price falls a lot.