Question

A new customer has been approved for all levels of options trading and has signed the options disclosure document. Even though approved for all levels of options trades, she notes that she will not be employing, and the registered representative (RR) should not recommend, any strategies with unlimited maximum loss potential. Given this criteria, an RR could suitably recommend

Answer 1

1. Covered Call: This strategy involves owning the underlying stock and selling a call option on those shares. It generates income and reduces some risk of being long on the stock alone. The trade-off is that you must be willing to sell your shares at a set price.

2. Married Put: In this strategy, an investor purchases an asset—such as shares of stock—and simultaneously purchases put options for an equivalent number of shares. This can help protect against a decline in the underlying stock’s value.

3. Long Straddle or Long Strangle: These strategies involve buying a call and a put option with the same (for straddle) or different (for strangle) strike prices but the same expiration date. They profit when the market moves either up or down.

4. Short Put Ladder: This strategy uses Put options to capitalize on the increased volatility of the price of the underlying asset. It has limited loss potential and unlimited profit potential.

Step-by-step explanation: