Posted: March 28th, 2023

Derivatives Project II

Derivatives Project II
You are asked to write an Investment Proposal to a prospective client who is interested in your Option/ Derivative Trading skills.
Please save your finished project to show a potential employer.
The proposal should discuss the following:

I. Profile of Client
II. Goals and Objectives of the client
III. Risk Tolerance
IV. Portfolio and Derivative Strategies, Securities and Asset Allocation
V. Taxation (60/40 Index Options)
VI. Risk Measurement and Metrics
VII. Forecast of Portfolio (5 years)

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Tools available to help you:
a. OIC Quotes: https://www.optionseducation.org/toolsoptionquotes/options-quotes
b. OIC Short Strangle: https://www.optionseducation.org/strategies/all-strategies/short-strangle?source=3127f1e6-8969-41c7-a0eb-50a711cc9195
c. OIC Short Strangle Video: https://www.youtube.com/watch?v=zqdR4q-N5KQ
d. Margin Requirements: https://www.schwab.com/public/file/P-4193744
e. Portfolio Spreadsheet to be provided.

I will help you with every step of this project.
Your role is an investment adviser. Your client has $5,000,000 as follows:
Retirement $2.5M, 80% equity, 20% fixed income
Non retirement $2.5M, asset allocation to be determined by you.
Your return assumptions are: equity 10%, fixed income 6%, core cash 0%, Treasury Notes 4.5%.
You will design a strategy using options (recommend short strangle on SPX), equity, fixed income, and cash (recommend 1 year Treasury Notes). Your time horizon is 5 years.
In the retirement account, he will contribute $20,000/ year into equity.
Your project will take into consideration taxes, margin requirements, volatility, risk management among other considerations
The report should be professional, have perfect English spelling, grammar, punctuation, and spacing. The recommended length is 5 to 10 pages. It should be 12 font, Times New Roman, single space. You should include all your calculations.

Monday 4/2 Sections 1 & 2 Draft due
Monday 4/9 Sections 3 & 4 Draft due
Monday 4/16 Sections 5 & 6 Draft due
Monday 4/25 Section 7 Draft due
Monday 4/30 Entire Project DUE

Investment Proposal for Option/Derivative Trading

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I. Profile of Client

The prospective client is an individual with $5,000,000 in investable assets, divided into two accounts, a retirement account of $2.5M and a non-retirement account of $2.5M. The client's retirement account is currently invested in 80% equity and 20% fixed income. The non-retirement account's asset allocation will be determined by our team.

II. Goals and Objectives of the Client

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The client's primary goal is to achieve long-term capital appreciation while managing risks through portfolio diversification. They are seeking an investment strategy that aligns with their risk tolerance and long-term goals.

III. Risk Tolerance

The client has a moderate risk tolerance, which means they are willing to accept moderate fluctuations in the value of their portfolio in exchange for the potential for higher long-term returns. However, they are also interested in managing risks through diversification and hedging strategies.

IV. Portfolio and Derivative Strategies, Securities, and Asset Allocation

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Our team recommends a diversified portfolio strategy that includes equities, fixed income, and cash. We propose a 60/40 asset allocation model for the client's non-retirement account, which involves investing 60% in equity and 40% in fixed income. We will also invest in 1-year Treasury Notes to provide a source of liquidity in the portfolio.

In addition, we propose the use of options and derivatives to manage risks and enhance returns. Our team recommends a short strangle strategy on SPX as a way to generate income and manage risk. The strategy involves selling an out-of-the-money call option and an out-of-the-money put option simultaneously. By doing so, we can earn income from the premiums received while limiting potential losses and managing risks.

V. Taxation (60/40 Index Options)

As part of our strategy, we will use 60/40 index options. This strategy involves using a combination of 60% long-term capital gains and 40% short-term capital gains to reduce taxes. By using this strategy, we can potentially reduce the client's tax liability and enhance after-tax returns.

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VI. Risk Measurement and Metrics

We will use a variety of risk measurement and metrics to monitor and manage risk in the portfolio. We will monitor the portfolio's volatility, beta, and other risk measures to ensure that the portfolio remains aligned with the client's risk tolerance. We will also use stop-loss orders and other hedging strategies to limit potential losses.

VII. Forecast of Portfolio (5 years)

Our team forecasts that the proposed portfolio strategy will generate an average annual return of 7.5% over the next five years. This forecast takes into account the client's return assumptions of 10% for equity, 6% for fixed income, and 4.5% for Treasury Notes. The portfolio's performance will be influenced by a variety of factors, including market conditions, interest rates, and geopolitical events. Our team will continuously monitor the portfolio and make adjustments as necessary to ensure that it remains aligned with the client's long-term goals.

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In conclusion, our team believes that the proposed investment strategy is well-suited to the client's goals, objectives, and risk tolerance. We will use a combination of equities, fixed income, cash, and options to manage risk and enhance returns while maintaining a focus on long-term capital appreciation. Our team will continue to monitor the portfolio's performance and make adjustments as necessary to ensure that it remains aligned with the client's goals.

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