Imagine that you are holding 5,800 shares of stock, currently selling at $65 per
ID: 2635858 • Letter: I
Question
Imagine that you are holding 5,800 shares of stock, currently selling at $65 per share You are ready to sell the shares but would prefer to put off the sale until next year due to tax reasons- If you continue to hold the shares until January, however, you face the risk that the stock will drop in value before year-end. You decide to use a collar to limit downside risk without laying out a good deal of additional funds. January call options with a strike price of $70 are selling at $5, and January puts with a strike price of $60 are selling at $6. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $51, $65, $71? What will the value of your portfolio be if you simply continued to hold the shares? Stock Price Portfolio Value $51 $65 $71 If collar is used $ $ $ If you continued to hold the shares $ $ $Explanation / Answer
The collar involves purchasing a put for $6 @strike = $60 and selling a call for $5 @strike = $70
1) Stock price = $51, Long put = $5; short call = $5, Total = ($51 + $5 + $5) X 5,800 = $353,800
2) Stock price = $65, Long put = -$6; short call = $5, Total = ($51 - $6 + $5) X 5,800 = $290,000
3) Stock price = $71,Long put = -$6; short call = -$6, Total = ($51 - $6 -$6) X 5,800 = $226,200