Derivatives for over concentrated position

CFA Level III Derivatives
#1

Hi all,

Please share your thoughts on the following question:

X suggests to Y that derivatives can be used as an alternative to an immediate sale a a way to reduce the risk in an over concentrated stock. But Y wishes to retain all of the security upside and minimize initial cost, X would recommend:

a) a collar
b) at ATM protective put
c) buying an OTM put and selling a further OTM put

Which strategy do you think is the correct answer? Thanks,

#2

C is for cookie

#3

I thought that C was for cheapskate.

1 Like
#4

C - definitely fulfills the retain all of upside + minimize initial cost, BUT would this make Y potentially incurring a greater loss if at expiration spot price is below further OTM put?

Thanks,

#5

Greater than . . . what, exactly?

1 Like
#6

Never mind, I see how this position still works out even if spot price is below the OTM put sold.

Thanks :+1: