Selectionof an investment strategy depends on the intention of the portfoliomanager. While some managers may prefer high risk high incomestrategies, others may prefer the growth of the investment fund. Inthis case, the investment strategies chosen are the technicalanalysis investment strategy and the bottom-up approach. Thestrategy can be deemed as a bottom up approach since the investordecided to choose a number of companies to include in the portfolionot informed by the dynamics of the economy but by the individualinterest in these companies and the strength of their shares. Thebasic assumption taken in this methodology of investment is that theindividual company would do well even when the sector and economy arenot doing so well. The decisions about this investment strategy isbased on the qualities of the specific firm that are got from adetailed review of its research reports, contact with its employeesand a detailed knowledge of its product (Stowe, 10). It also explainsthe fact that this approach could produce unreliable results ingauging the gains that could be achieved from an investmentportfolio. In this case, the investor chose to include a secondstrategy in the portfolio.
Theinvestment strategy also includes technical analysis. This is due tothe fact that the investor is majorly concerned with the pricedynamics in the market. The technique involves the analysis of theprice movements before making a bid on the options selected. Itemploys the use of analysis tools to determine the relative pricemovements that will profit the investor in the long run. Theadvantage of this method is that the tools used could effectivelyevaluate the movement of prices with very little chance of optionsmile leading to good returns.
Thestocks chosen in this investment portfolio are the stocks of Google,Netflix and 3D systems. These stocks were chosen based on thestrength of the company and the possibility of the stock pricesrising leading to profitability of the investment. Screening forstocks on this basis is not an easy task. This is due to the factthat the investor will have to thoroughly observe the trends of thecompany in order to make speculations on its potential growth andstability.
Theoptions were majorly traded from the holder position. This providesfor a number of possible advantages on hedging, costs and risks. Onrisks, uncovered options will expose the writer to unlimited riskthat can result in a great loss. This implies that in order to tradeeffectively and minimize the level of risk it is advisable for theinvestor to trade from the holder position. Other benefits of tradingfrom the holder position include the ability to tailor thespeculations in a variety of ways other than the traditionalfluctuation of prices of stock. The holder ill also gain access tothe underlying stock in a cheaper way through options as compared tothe conventional trading in securities
However,trading options from the holder position could also prove to be anexpensive undertaking. This is due to the fact that the investor hasto pay premiums. In the case where the stock prices do not reach thestrike prices by the expiry date, the options expire worthless andthe holder loses the premiums. In this case the most favorableposition of trading is being the writer of a covered call or acovered put. Even though trading in options is also a complex andtiresome exercise that requires the investor to constantly monitorand maintain, the options provide a significant cover of loss andreduce the potential risks of trading. In this case, the investoropts majorly to trade mainly on put strategy in the options.
Thestrategies of trading involved are a put and a call in trading theoption. In the short call, the covered call will result in losses ininvestment due to the negative value of the theta and Rho, however inthe long run the strategy provides the investor with an opportunityto profit. This is due to the fact that the prices of the securitiesare largely expected to fall with the exact margin as the price ofthe option. As prices increase, the level of increase in loses to theinvestor also increases. The implication on this strategy is thatwhile it limits the risks, the losses on a short call can beunlimited due to the unlimited nature of price increases.
Inthe case of Google shares, a negative value of theta or itsequivalence to zero still lead to the holder of the shares makingprofit in the long run. With prices remaining fairly stable at theexpiry of the contract, it would mean that the profits are equivalentto the value of the option price. The use of covered calls in thiscase worked but the strategy employed will offer the investor withlimited protection to risk as discussed previously.
Theother option that could be implemented by the holder of thesesecurities is by considering the value of beta in this technicalanalysis. A low value of beta in the analysis indicates that theprices of the underlying securities would remain fairly stable over aconsiderable period of time. The speculation in this case is that theprices will not reach the strike price agreed in the contract. AnOut-of –the-money call option is the most suitable call strategy toimplement in this case. Upon the contract expiring worthless, theinvestor or holder of the shares still gets to keep the securitiesand makes a profit on the call options (Napier,09).
Thestocks of 3D systems and Netflix were traded by the Put strategy oftrading. The choice of position is based on the price fluctuations.In a case where the prices are largely expected to go down over time,the best position is a long put position. In the case of 3D systems,the prices are speculated to go down by the indicators of theta andRho. It is therefore essential that the put option implemented takesa long put position that would lead to profitability.
Ingeneral, the technical analysis provides for a simplistic method ofinvestment that can be used to analyze the stock market trends andpredict the behavior of securities. While trading in options it isthe best method that would point the investor in the right directionof investment. It is also important to note that while trading inoptions is fairly complex as opposed to the ordinary trade insecurities, it offers a significant reduction on the level of risk.
Napier,Victor.FastMoney: 7 Days to Successful Options Trading.London. IUniverse, 2010. Print.
Stowe,John D. EquityAsset Valuation.Hoboken, N.J: John Wiley, 2007. Print.