Michael Stevens Option Strategy

Introduction Michael Stevens is a relatively new investor struggling to maintain profits in an uncertain economy. Recent conflicts and conflicting reports have left the Canadian Market muddled and somewhat divided. Michael capitalized on recent volatility in the market and has gained some unrealized profits. He sees a bullish economy returning in the near future but would like to ensure that his profits are maintained even through minor volatility for the next six months. He plans to do this through investing in options and is considering several different strategies.

1. Assessment of the Six-Month Outlook for the Market Only four years prior to Michael’s considerations, there was a significant market crash lowering the average value of the Toronto Stock Exchange by 20%. A steep rise in interest rates prior to 1991 and the Persian Gulf crisis lowered the value of stocks as well. There were conflicting signs between markets rallying and the country remaining in recession. With major deficits in place and the government unable to aid recovery by providing stimulus, the economy was not likely to recover incredibly quickly in the next six months which would be the best case. However, with the resolution of conflict and some positive reports like near average dividend yields point towards an eventual recovery even if it takes more than six months. Michael’s long term stock outlook seems reasonable and likely as it is not too bullish and necessitates precaution on his part via some sort of insurance. This slow recovery scenario would avoid the worst case scenario in which a double dip back into some sort of recession occurs. While after a downturn in his portfolio provided awakening, such insight would have been useful before this point in time. Michael had solid gains before this minor collapse and could have protected said profits using the same methods the downturn scared him into taking. Taking advantage after the dip and buy undervalued stocks showed a decent