John is a sophisticated trader who specializes in exotic options in emerging markets. Given the unstable political climate in Country Z, there's uncertainty around the country's primary
export, mineral X. This has led to volatility in the stock price of MiningCorp, a major producer of mineral X.
John believes that in six months, there will be clarity regarding the political situation, which will subsequently determine the direction of MiningCorp's stock price. He wants to position
himself to benefit from the potential price movement of MiningCorp but is unsure about the immediate future.
To manage this, John considers buying a compound option, giving him the right, but not the obligation, to purchase another option on MiningCorp's stock at a future date. John is particularly
focused on structures that give him flexibility on both timing and direction but is concerned about the cost implications of such a strategy.
Given John's scenario and constraints, which of the following strategies using compound options would provide him the flexibility on timing and direction but would generally cost less in
terms of premium compared to straightforward options due to its compound nature?
a) Buy a call on a call option and buy a call on a put option on MiningCorp.
b) Buy a put on a put option and sell a call on a call option on MiningCorp.
c) Sell a put on a put option and sell a call on a call option on MiningCorp.
d) Buy a put on a call option and buy a call on a put option on MiningCorp.
John wants flexibility in terms of direction (i.e., the ability to potentially take a long or short position depending on how the political situation evolves) without making a directional
bet at present. He's also looking for a cost-effective strategy, but the main priority seems to be the flexibility on timing and direction.
a) Buy a call on a call (CoC) and buy a call on a put (CoP): This strategy gives John the option to take a long position if he exercises the CoC or a short position if he exercises the
CoP. Essentially, it offers the flexibility to choose the direction based on how the political scenario pans out.
Given the scenario, it's evident that option:
a) Buy a call on a call option and buy a call on a put option on MiningCorp
is the most suitable for John as it provides the flexibility he desires in terms of both timing and direction.
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John wants flexibility in terms of direction (i.e., the ability to potentially take a long or short position depending on how the political situation evolves) without making a
directional bet at present. He's also looking for a cost-effective strategy, but the main priority seems to be the flexibility on timing and direction.
a) Buy a call on a call (CoC) and buy a call on a put (CoP): This strategy gives John the option to take a long position if he exercises the CoC or a short position if he exercises
the CoP. Essentially, it offers the flexibility to choose the direction based on how the political scenario pans out.
Given the scenario, it's evident that option:
a) Buy a call on a call option and buy a call on a put option on MiningCorp
is the most suitable for John as it provides the flexibility he desires in terms of both timing and direction.
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