The Kuala Lumpur CI is standing at 1650 now. You, as the fund manager under AT Asset Management Berhad, is managing a portfolio which tracks the performance of the Composite Index. With current equity market sentiments, you expect the Malaysian stock market to be stable over the next two to three months. You would like to use options to enhance the value of your portfolio so that your fund will perform better than the market although the market is being very stable. The following KLCI options are available:

October 1,640 points KLCI Call options @ 70 points

October 1,650 points KLCI Call options @ 60 points

October 1,660 points KLCI Call options @ 40 points

October 1,640 points KLCI Put options @ 50 points

October 1,650 points KLCI Put options @ 60 points

October 1,660 points KLCI Put options @ 70 points

Under the current market outlook, explain the best strategy to use in order to enhance the value of your portfolio. Provide your reason. (5 marks)

Draw a payoff diagram to illustrate your strategy. (5marks)