Stock options have given the portfolio manager a whole new set of tools for adjusting the risk and return characteristics of his investments. Studies by Malkiel and Quandt and, subsequently, Gastineau, have identified a number of investment strategies whose success depends on the value of the underlying stock in different ways, depending on the kind and number of option positions taken. Missing from these studies, however, is an explicit quantification of risk-return relations for the various strategies.
The author quantifies the tradeoffs for 18 strategies ranging from the simple (purchase of the stock) to the complex (reverse option hedge). To assist investors in choosing among these strategies, he sorts them by profit-loss profile into five groups and identifies the dominant strategy within each group.