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You have a portfolio with long positions in both puts and calls. The volatility in the market rises. A. Your portfolio gains in value. B. Your portfolio is now riskier and is therefore worth less than before. C. Your portfolio gains on the calls and loses on the puts. D. Your portfolio gains on the puts and loses on the calls.

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Answer:

The correct answer is B) Your portfolio is now riskier and is therefore worth less than before

Explanation:

In the parlance of Investment, a portfolio simply refers to a collection of investments. They may include but are not limited to:

  • Stocks
  • Bonds
  • Commodities
  • Closed-end funds etc.

An investment with long positions is one that is purchased with an expectation that it will appreciate or rise in value. Call and Put options refer to the right (not a mandatory responsibility) for an investor to buy and sell an investment. Where Call is buying and Put is selling.

A volatile market is in most cases synonymous with a riskier market. In high-risk markets, the value of investments tends towards the negative. The opposite is true.

When there is a disequilibrium of trade orders (such as all Calls and no Puts), it can quickly lead to a volatile market. this condition can be triggered by

  • economic information released from very credible sources
  • news about a company whose stocks are highly traded
  • a recommendation from a highly reputable investment analyst etc.

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