Question

Imagine that you are holding 5,100 shares of stock, currently selling at $30 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 $35 are selling at $1, and January puts with a strike price of $25 are selling at $2. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $21, $30, $41? What will the value of your portfolio be if you simply continued to hold the shares?

Answer 1

If stock is continued to hold $107,100, $153,000, $209,100.

Step-by-step explanation:

The first step is to calculate the value of your portfolio if u simply continued to hold the shares.

The stock holding = 5100

the current price = 30

The value of the portfolio is = 5100 * 30 =$ 153,000

The strike price= $21

The portfolio value is = 5100 * $21 = $107,100

The stock price = 5100 * $41 = $209,100

Thus,

The value of the portfolio calculation (net option proceed)

The current price =$30

Value of portfolio = Holding value + received from call option + paid to buy option

=5100 * 30 + 5100 * 1-5100 * 2

= $147,900

The strike price = $21

The January stock price = $ 25

The profit of option selling = $25 -$21 = $4 * 5100 = $20, 400

Value of portfolio = Holding value + received from call option + paid to buy option

= 5100 * 21 + 5100 * 1-5100 *2 + $20,400

which is = $122,400

Then,

The strike price = $4

The selling option loss = $41-$35= $6 * 5100 = $30,600

Value of portfolio = Holding value + received from call option + paid to buy option

which is = 5100 * 41 + 5100 * 1-5100 * 2 + $30,600

= $173, 400

Therefore

Stock price $21 $30 $41

if collar used $122,400 $147,900 $173,400

If stock is continued to hold stocks$107,100 $153,000 $209,100