Imagine that you are holding 5,200 shares of stock, currently selling at $35 per
ID: 2749960 • Letter: I
Question
Imagine that you are holding 5,200 shares of stock, currently selling at $35 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 $40 are selling at $2, and January puts with a strike price of $30 are selling at $3. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $25, $35, $45? What will the value of your portfolio be if you simply continued to hold the shares?
Stock Price
Stock Price
Portfolio Value $25 $35 $45 If collar is used $ $ $ If you continued to hold the shares $ $ $Explanation / Answer
I don't need to buy Call option as I already hold the shares. I can just buy the put options and excercise my right only in case of the profiatble situation as per below.
1. If the share price is $25, then I will exercise my right to sell my shares at $30.
2. If the share price is $35, then I do not need to execise my right to sell the share at $30 and I can directly sell them in the market @$35, but will have to incur the option cost of $15,600.
3. If the share price is $45, then I do not need to execise my right to sell the share at $30 and I can directly sell them in the market @$45, but will have to incur the option cost of $15,600.
PUT@3 with Strike Price $30 Stock Price Portfoilio Value $25 $35 $45 If Collar is used $140,400 $166,400 $218,400 If you continued to hold the share $130,000 $182,000 $234,000 Cost of Put option @3 15600 15600 15600 Cost of CAlll option @2 10400 10400 10400 Stock Price Portfoilio Value $25 $35 $45 If Collar is used $0 $171,600 $223,600 If you continued to hold the share $130,000 $182,000 $234,000 Cost of Put otion @2 10400 10400 10400