Risk and Return for Option Investment Strategies

Stock options have given the portfolio manager a whole new set of tools for adjusting the risk and return characteristics of his investments. Studies by Malkiel and Quandt and, subsequently, Gastineau, have identified a number of investment strategies whose success depends on the value of the underl...

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Bibliographic Details
Published in:Financial analysts journal 1980-09, Vol.36 (5), p.67-73
Main Author: Slivka, Ronald T.
Format: Article
Language:English
Subjects:
Analysis
Common stock
Expected returns
Fair market value
Fair value
Investment
Investment risk
Investment strategies
Investors
Options
Portfolio investments
Portfolio management
Return on investment
Risk
Stock options
Stock prices
Stock purchases
Stock sales
Strategy
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Summary:Stock options have given the portfolio manager a whole new set of tools for adjusting the risk and return characteristics of his investments. Studies by Malkiel and Quandt and, subsequently, Gastineau, have identified a number of investment strategies whose success depends on the value of the underlying stock in different ways, depending on the kind and number of option positions taken. Missing from these studies, however, is an explicit quantification of risk-return relations for the various strategies. The author quantifies the tradeoffs for 18 strategies ranging from the simple (purchase of the stock) to the complex (reverse option hedge). To assist investors in choosing among these strategies, he sorts them by profit-loss profile into five groups and identifies the dominant strategy within each group.
ISSN:0015-198X
1938-3312
DOI:10.2469/faj.v36.n5.67