Suppose I believe it would be profitable to build an investment portfolio by investing, say, USD 30,000 in stocks in the following ratio: 30% in shares of CompanyA, 30% in CompanyB and 40% in CompanyC. Say that my analysis shows that over the past 10 years, these stocks have performed well as a portfolio, and have a Sharpe ratio of, for example 1,50.
Suppose further that I consider two different strategies.
Strategy 1: invest USD 30,000 directly in the stocks in the ratio mentioned above: 30% A, 30% B and 40% C.
Strategy 2: Instead of investing in the shares of these companies I, would buy long term call options (with a maturity of say 2 years) on these same shares, in the same ratio: 30% calls CompanyA, 30% calls CompanyB, and 40% calls CompanyC.
Of course, there might be large unforeseen shocks that ruin my approach by making my call options go to USD 0, so that I lose my money. But apart from that, (1) is it reasonable to think that the same diversification effect that I expect in strategy 1 would also occur in strategy 2? And (2) what am I overlooking if I would invest in Strategy 2?