value: .48 points magine that you are holding 6,500 shares of stock, currently s
ID: 2790078 • Letter: V
Question
value: .48 points magine that you are holding 6,500 shares of stock, currently selling at $45 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 $50 are selling at $2, and January puts with a strike price of $40 are selling at $4. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $33, $45, $53? What will the value of your portfolio be if you simply continued to hold the shares? Stock Price Portfolio Value If collar is used If you continued to hold the shares 533 545 S53Explanation / Answer
Portfolio Value if Shares are Held and Share Price is $33 =$6500x33 =$214,500
Portfolio Value if Shares are Held and Share Price is $45 =$6500x45 =$292,500
Portfolio Value if Shares are Held and Share Price is $53 =$6500x53 =$344,500
Collar Strategy
Under this strategy, the investor buys the Put and Sells the Call (Both In the money) with the same expiry date and of the same stock as of the underlying.
So, in our case the investor will buy Put at Strike Price of $40 by paying premium of $4 per share
And he will sell the Call at Strike price of $50 and will receive premium of $2 per share
Payoff Under Collar if Stock Price is $33 in Jan = 6500x{Payoff in Put + Payoff in Call}
=6500x{Max(40-33,0)-4 + Max(33-52,0) + 2}
=6500x{3 + 2}
=32,500
Portfolio Value under Collar at Stock Price of $33 =$214,500 + 32,500 =$247,000
Payoff Under Collar if Stock Price is $45 in Jan = 6500x{Payoff in Put + Payoff in Call}
=6500x{Max(40-45,0)-4 + Max(45-52,0) + 2}
=6500x{-4 + 2}
=-13,000
Portfolio Value under Collar at Stock Price of $45 =$292,500 - 13,500 =$279,000
Payoff Under Collar if Stock Price is $53 in Jan = 6500x{Payoff in Put + Payoff in Call}
=6500x{Max(40-53,0)-4 + Max(53-52,0) + 2}
=6500x{-4 + 3}
=-6,500
Portfolio Value under Collar at Stock Price of $53 =$344,500 - 6,500 =$338,000
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