Investments, tenth edition

 Figure 20.5 

Rate of return to three strategies  

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  C H A P T E R  

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  Options Markets: Introduction 

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 This simple example makes an important point. Although options can be used by 

speculators as effectively leveraged stock positions, as in portfolio  B,  they also can be 

used by investors who desire to tailor their risk exposures in creative ways, as in port-

folio  C.  For example, the call-plus-bills strategy of portfolio  C  provides a rate of return 

profile quite unlike that of the stock alone. The absolute limitation on downside risk 

is a novel and attractive feature of this strategy. We next discuss several option strate-

gies that provide other novel risk profiles that might be attractive to hedgers and other 

investors.    

  An unlimited variety of payoff patterns can be achieved by combining puts and calls with 

various exercise prices. We explain in this section the motivation and structure of some of 

the more popular ones.