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Imagine that you are holding 5,300 shares of stock, currently selling at $40 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 $45 are selling at $3, and January puts with a strike price of $35 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 $28, $40, $48

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Answer:

A. $180,200

$148,400

B.$206,700

$212,000

C. $233,200

$254,400

Explanation:

A. Calculation to determine the value of your portfolio in January and the value of your portfolio if you simply continued to hold the shares

STOCK PRICE $28

First step is to calculate the Value at expiration Using this formula

Value at expiration = Value of call + Value of put + Value of stock

Let plug in the formula

Value at expiration= $0 + ($35 - $28) + $28

Value at expiration= $35

Now let calculate the total net proceeds

Using this formula

Total net proceeds=(Final value - Original investment) × numbers of shares

Total net proceeds= ($35 - $1) × 5,300

Total net proceeds= $180,200

Calculation to determine the Net proceeds without using collar

Using this formula

Net proceeds without using collar = Stock price × Number of shares

Let plug in the formula

Net proceeds without using collar= $28 × 5,300 Net proceeds without using collar= $148,400

Therefore the value of your portfolio in January is $180,200 and the value of your portfolio if you simply continued to hold the shares is $148,400

B. STOCK PRICE= $40

First step is to calculate the Value at expiration using this formula

Value at expiration = Value of call + Value of put + Value of stock

Let plug in the formula

Value at expiration= 0 + 0 + $40

Value at expiration= $40

Now let calculate the total net proceeds

Using this formula

Total net proceeds=(Final value - Original investment) × numbers of shares

Total net proceeds= ($40 - $1) × 5,300

Total net proceeds= $206,700

Calculation to determine the Net proceeds without using collar

Using this formula

Net proceeds without using collar = Stock price × number of shares

Let plug in the formula

Net proceeds without = $40 × 5,300

Net proceeds without= $212,000

Therefore the value of your portfolio in January is $206,700 and the value of your portfolio if you simply continued to hold the shares is $212,000

C. STOCK PRICE $48:

First step is to calculate the Value at expiration using this formula

Value at expiration = Value of call + Value of put + Value of stock

Let plug in the formula

Value at expiration= ($45 - $48) + 0 + $48

Value at expiration = $45

Now let calculate the total net proceeds

Using this formula

Total net proceeds=(Final value - Original investment) × Numbers of shares

Total net proceeds= ($45 - $1) × 5,300

Total net proceeds= $233,200

Calculation to determine the Net proceeds without using collar

Using this formula

Net proceeds without using collar= Stock price × Number of shares

Let plug in the formula

Net proceeds without using collar= $48 × 5,300

Net proceeds without using collar= $254,400

Therefore the value of your portfolio in January is $233,200 and the value of your portfolio if you simply continued to hold the shares is $254,400