Question

Bill jones inherited 5000 shares of stock priced at $50 per share. he does not want to sell the stock this year due to tax reasons but he is concerned that the stock will drop in value before year-end. Bill wants to buy put at $40 strike and sell calls at $50 strike to establish a collar to protect his inheritance. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss is _____

a. $195,000
b. $220,000
c. $175,000
d. $215,000

Answer 1

a. $195,000

Step-by-step explanation:

call strike price $50

call premium received $2

put strike price $40

put premium paid $3

you pay $2 - $3 = -$1

stock value $35

put value $5

call value -

premium paid -$1

net stock value $39

total # of stocks 5,000

portfolio's value $195,000