Question

On Jan 11, 2012, you purchased 100 shares of Apple, Inc., which closed at $167.09. First, you write one contract of the March 2012 $175 call at $3.65. Next, you buy one contract of the March 2012 $160 puts, which are trading at $4.50. What is your profit/ loss diagram of this protective collar? (Please mark ALL the critical points, including the breakeven point, maximum gain, and maximum loss)

Answer 1

Case 1) Call Option at $175 call at $3.65 premium

The investor purchased share for ttotal $16,709   ($167.09*100)

Net amount received to get into call contract= 100*$3.65 = $365

While he receives money by selling the call option= $17,500 ($175*100)

Maximum potential loss would be= $16709-$365 = $16,344

For maximum gain, the contract need to be exercised, hence $17500 + $365 - $16709= $1156

Maximum gain is $1156

BEP= $16,344 (16709-365), In case the option not exercised then he should be able to get atleast $16,344 by selling the underlying assets in the market

Case 2) Put option at $160puts at $4.50 premium

Buy contract @$4.50 for 100 shares, hene net premium paid= $450

Maximum loss would be $450 only if not exercised the contract in this case

Maximum gain would be:   The maxm gain could not not be considered in this case as the price set was low and possibility is low for profit until and unless price would go beyond $171.59( which is $167.09 + $4.5 (premium paid)) and option was not exercised.

Breakeven Point would be at $171.59*100= $17,159

hence, exercising option won't give profit in this scenerio.

Graphically: