See extract below:
Justine Fisher, a client of Alpha, holds a significant position in Dropqik Corporation, which currently trades at $30.50 per share. Fisher remains optimistic about the long-term performance of the stock and does not want to sell the shares. She is, however, concerned about potential future volatility and a short-term loss, and wants to protect the position’s value with minimal cost.
- The most appropriate option strategy for Fisher is a:
A. .collar.
B. covered call.
C. short straddle.
The answer is allegedly A (as it provides downside protection) but how can it be if she’s optimistic about long term performance and doesn’t want to sell the shares?
They say it’s not B because the shares could potentially be called away, but with their own logic how can it be A?
I think there’s a mistake here and it just so happens that none of the options are appropriate
Thoughts?
The 2020 mock was infamous for this sort of thing.
On the one hand, it’s frustrating.
On the other hand, it’s a bit comforting to know everyone including CFA societies are stumped from time to time on all this stuff. So I feel less bad about my own study challenges.
Basically, B and C are throwaways in any case. So A is the remaining choice. On the actual exam it will be written better than was written in that mock exam.
The way I looked at it, when they say “concerned about volatility” you know it cannot be a short straddle. And when they say “concerned about loss” it can’t be a covered call.
I guess for the collar they mean a very deep out of the money call being sold here. Like so far out of the money that the chance of it being executed prior to expiry is low to none in the person’s mind.
Thanks again - it really does baffle me that they’ve made so many mistakes across this and 2021 mock exams.
If it wasn’t for these sorts of forums I’d be tearing my hair out thinking that I’m the one that’s made the mistake and not them
Oh well, what can you do - they best not have any mistakes in the real exam lol
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Asking these sorts of questions means you’ve got a good grip on the concepts so it’s all positive buddy!
Thanks dude - and you must do too as you’ve been answering them! All the best!
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