Case

Gordon Powles works for Creighton Capital Management and manages endowments and trusts for large clients. The fund invests most of its portfolio in S&P 500 stocks, keeping some cash to facilitate purchases and withdrawals. The fund’s performance has been quite volatile, losing over 20 percent last year but reporting gains ranging from 5 percent to 35 percent over the previous five years. Creighton’s clients have many needs, goals, and objectives, and Powles is called upon to design investment strategies for their clients. Powles is convinced that the best way to deliver performance is to, whenever possible; combine the fund’s stock portfolio with option positions on equity.

Question 1 A colleague of Powles, Maris Wright, CFA, convinced Powles that even though the volatility of the stock market can remain low until the end of the year, there is also a chance that the market will have a small increase by the end of the year. Currently the S&P 500 index is at 1930 and Powles is considering using call options with strike prices at 1890, 1910, 1930, 1950 and 1970 to construct an asymmetric butterfly strategy in order to capitalize on the expectations about the S&P 500 index. The correct way to set the asymmetric butterfly is

A. to take 2 long call at 1890 strike, 4 short call at 1910 strike and 1 long call at 1970 strike.

B. to take 2 long call at 1890 strike, 6 short call at 1930 strike and 4 long call at 1970 strike.

C. to take 3 long call at 1890 strike, 4 short call at 1910 strike and 1 long call at 1970 strike.

D. to take 2 long call at 1890 strike, 8 short call at 1950 strike and 6 long call at 1970 strike.