You run a mutual fund and you have decided that the most that Sears stock is wor
ID: 2769965 • Letter: Y
Question
You run a mutual fund and you have decided that the most that Sears stock is worth is $20 and you plan on selling the stock when it reaches that point. What option strategy could you take to make a profit on your planned trade?
Using the following information calculate the portfolio value on the exercise date and the profit from your strategy.
Stock Price Today = $18.22
Strike Price = $20
Call Price = $2.54
Put Price = $3.35
Scenario 1. Sears’ stock price rises to $25 on the exercise date.
Scenario 2. Sears’ stock price falls to $15 on the exercise date.
Explanation / Answer
Scenario 1:
When stock price rises; to hedge it we should opt for call option.
Profit from call option = Exercise price – Strike price – call price
=$25-$18.22-$2.54
=$4.54
Scenario 2:
When stock price falls; to hedge it we should opt for put option.
Profit from call option = Exercise price – Strike price + put price
=$15-$18.22+$3.35
=$0.13
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