You buy a 950-strike put for 51.777 and sell and 1050-strikecall for 71.802. If you...

You buy a 950-strike put for 51.777 and sell and 1050-strike call for 71.802. If you wanted a zero-cost collar keeping the put strike equal to $950m in what direction would you have to change the call strike?

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Expert Solution

Put strike: $950

Put cost: $51.777

Call strike: $1,050

Call price: $71.802

By selling the 1,050 strike call option we would receive a premium of $71.802 per share, which is more than the cost of put.

To make our position a zero-cost collar, we would move our call option strike further out of the money. That is, we move the call option strike greater than $1,050. The price of call options for strikes above 1,050 will be lower than the price of 1,050 strike call option.

We will choose a strike whose call option price is equal to $51.777 (closely)

jeff jeffy answered 2 years ago

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