Answer:
Consider the following calculations
Explanation:
Number of Shares held = 7000
Current Price = $ 70
Portfolio Value = 7000 * 70 = 490,000
If continued to hold the shares
Portfolio value at $ 57 = 7000 * 57 = 399,000
Portfolio Value at $ 77 = 7000 * 77 = 539,000
If implemented collar strategy - Selling a call option and buying a put option
Call option
Strike Price = 75
Price of the option = $ 2
Put Option
Strike Price = 65
Price of the option = $ 4
Amount received on sale of Call option = 7000 * 2 = 14,000
Amount paid on buying a put option = 7000 * 4 = 28,000
Value of the Portfolio = 7000 * 70 + 14000 – 28000 = 490,000 +14000 – 28000 = 476,000
If the stock price in January is 57
As the strike price 75 is higher than the current market price of 57, the call option buyer will allow the option to expire
As the strike price of 65 is higher than the current price of 57, the investor will utilise the put option
Profit from Put option can be obtained by buying shares from market and selling the same under the put option
Profit from put option =7000 * (65-57) = 7000 * 8 = 56000
Value of the portfolio = Holding Value at current price + premium received – premium paid+ profit from put option
= 7000 * 57 + 14000 – 28000 + 56000
= 399000 + 14000 – 28000 + 56000
= 441,000
If the stock price in January is 70
As the strike price 75 is higher than the market price of 70, the call option buyer will allow the option to expire
As the strike price of 65 is lower than market price of 70, the invest will allow the put option to expire
Portfolio Value = Holding value at current market price + premium received – premium paid
= 7000 * 70 + 14000 – 28000
= 490000 + 14000 – 28000 = 476,000
If the market price in January is 77
As the strike price of 75 is lower than market price of 77, the buyer of call option will enforce the call option
Loss from call option = 7000 * (77-75) = 7000 * 2 = 14000
As the strike price of 65 is lower than market price of 77, the investor will allow the put option to expire
Portfolio Value = Holding value at current market price + premium received – premium paid – loss on call option
Portfolio value = 7000 * 77 + 14000 – 28000 – 14000
= 539000 + 14000 – 28000 – 14000
= 511,000
