Mick Taylor is portfolio manager of a well-diversified, large-cap U.S. equity fund. Recently, Taylor and his team
Question:
Mick Taylor is portfolio manager of a well-diversified, large-cap U.S. equity fund. Recently, Taylor and his team have been overweight cash, luckily avoiding a large drawdown in the S&P 500. After a near 30% decline in the headline Index, Taylor is feeling more optimistic about U,5. equity prices. However, Taylor notices that implied volatility, derived from the 5&P 500 options chain, remains 3 at abnormally high levels. Hence, Taylor decides to express his bullish views via index options, rather than risking the fund's full cash amount by investing in individual stocks. Taylor also believes the elevated levels of volatility are likely to decline during the next few months. Details on the S&P 500 3-month option chain are shown below. The 500 Index is currently trading at 2785. The index multiplier is 100.
Strike | $Bid | SAsk | Implied Vol | Delta | Open Intertest |
2575 | 308.4 | 312.7 | .4127 | .6955 | 8,183 |
2650 | 253.8 | 285.2 | .3931 | .6411 | 10,264 |
2785 | 164.9 | 167.9 | .3510 | .5259 | 2,857 |
2900 | 101.6 | 103.9 | .3164 | .4073 | 47,984 |
3000 | 58.5 | 60.7 | .2874 | .2948 | 51,659 |
Puts | |||||
Strike | $Bid | SAsk | Implied Vol | Delta | Open Intertest |
2575 | 104.9 | 106.9 | .4048 | -.3019 | 13,023 |
2650 | 125.2 | 127.3 | .3840 | -.3564 | 32,573 |
2785 | 170.2 | 172.8 | .3439 | -.4745 | 2,099 |
2900 | 221.0 | 224.6 | .3087 | -.5959 |
47,741 |
3000 | 277.6 | 281.6 | .2785 | -.712 | 48,256 |
19. If Taylor bought the 2650 call and sold 2900 call, Taylor would have
A. Unlimited upside potential and limited downside
. Limited upside potential and unlimited downside potential
C. Limited upside potential and limited downside potential