Imagine that you are holding 6,300 shares of stock, currently selling at $35 per
ID: 2768753 • Letter: I
Question
Imagine that you are holding 6,300 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 $5, and January puts with a strike price of $30 are selling at $7. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $26, $35, $46? What will the value of your portfolio be if you simply continued to hold the shares?
Stock Price Portfolio Value $26 $35 $46
If collar is used $ $ $
If you continued to hold the shares $ $ $
Explanation / Answer
Solution :
Solve in a tabular form along with formula
Particulars Current share price 35 35 35 Strike price 26 35 46 Current portfolio value 220500 220500 220500 No of shares 6300 6300 6300 Call option -5 -5 -5 Put option -7 -7 -7 Share value 163800 220500 289800 Call Profit/loss(current - strike)*6300 -31500 -31500 37800 Put profit/loss (current-strike)*6300 12600 -44100 -44100 Portfolio value 144900 144900 283500