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?

Portfolio Value	$25	$35	$45
If collar is used	$	$	$
If you continued to hold the shares	$	$	$

Answer 1

Solution: 35 stock price 25 45 150800 176800 202800 130000 182000 234000 If collar is used (Note 1) If you continued to hold the shares (Note 2) Note 2: Note 1: collar means buying stock along with writing OTM call and buying OTM put simultenously to hedge downside risk call strike price call premium received Put strike price Put premium paid Initial outlay=3-1 calculation of value of portfolio If you continued to hold the shares Net proceeds per share x Number of shares value of portfolio If you continued to hold the shares stock price at expiration 25 35 45 5200 5200 5200 130000 182000 234000 calculation of value of portfolio if collar is used stock price at expiration value of stock Add : value of Put (30-25) Less : value of call (45-40) Less : Initial outlay Net proceeds per share x Number of shares value of portfolio if collar is used 500 005 -1 -1 -1 29 - 34|| 5200 5200 5200 150800 176800 202800 Sheet68 Sheet69 Sheet 70 Sheet71 Sheet72 Sheet73 Sheet74 Sheet75 Sheet 76 Sheet77 HA ENG - 11:38 TO US 06/11/2019