Assume you establish a protective put position on OVTI stock today by buying 100 shares of...

Assume you establish a protective put position on OVTI stock today by buying 100 shares of OVTI stock at $30 per share and buying a 6-month put option contract on the same stock. Each put option has a strike price of $30 and a premium of $2.50. What is the breakeven stock price for this strategy?

Expert Solution

*Assuming contact size for Put option on OVTI = 100

So Portfolio = long 100 OVTI stocks + long 100 OVTI Puts_{6month_$30Strike}

Profitability_portfolio = 100*(S_T - S₀) + 100*MAX(K-S_T,0) - Put Premium

implies Profitability_portfolio = 100*(S_T - 30) + 100* [MAX(30-S_T?,0) - 2.5]

implies Profitability_portfolio = 100*[S_T + MAX(30-S_T?,0)] - 3250

Breakeven occurs when Profitability_portfolio = 100*[S_T + MAX(30-S_T?,0)] - 3250 = 0

implies 100*[S_T + MAX(30-S_T?,0)] = 3250

implies [S_T + MAX(30-S_T?,0)] = 32.5 ...(1) {dividing by 100 on both side}

eqn (1) is satisfied when S_T = $32.5.

Hence breakeven point for this stategy is when S_T = $32.5.

[Note: generic formula: Breakeven point of protective Put will occur when S_T = S₀ + Put Premium. So in our case when when S_T = 30 + 2.5 = 32.5]

*you can also construct a table and tabulate profitability for different values of S_T and trace out graph to arrive at breakeven point.

jeff jeffy answered 2 years ago

A protective put position is formed by buying the stock and buying a put option on...

A protective put position is formed by buying the stock and buying a put option on the same stock. Given the following quotations from April 25, 2017 for Amazon stock and an Amazon put option, answer the questions below. Closing price of Amazon stock = $832 per share. Option strike price = $800 Closing price of the put option = $18.30 Put option expiration date: June 16, 2017 a) Plot the payoff and profit diagrams for the protective put position...

You set up a “Protective Put” position on a stock-index currently priced at $54.50, using the...

You set up a “Protective Put” position on a stock-index currently priced at $54.50, using the following put option: [P(S0=$54.50, T=3 months, X=50)] that has a current price of $0.50 in the market. Scale the transactions by one option contract. There are four parts to this answer, a) to d). (Show calculations that you performed to get the final answer, in order to earn more partial credit, in the event that you miss the final answer.) a) What are your holdings...

a. Assume that you would like to buy 100 shares of a stock that is currently...

a. Assume that you would like to buy 100 shares of a stock that is currently priced at $ 70. The initial margin is 75% and maintenance margin is 35%. How much would the total purchase amount to in dollars. How much in total cash of your own do you need in dollars in this example? How much will you be able to borrow in dollars in this example? b. Show your total dollar amount of investment and your results...

A trader at the Kewar Stock Exchange took a SHORT POSITION in 100 shares of the...

A trader at the Kewar Stock Exchange took a SHORT POSITION in 100 shares of the Mitha kora at Tk.46.00 per share. The initial margin requirement was 40 percent while the maintenance margin is 30 percent of current market price. Determine the initial margin, maintenance margin, and the amount of replenishment if the price of Pyera stock changes to (a) Tk.38.00, (b) Tk.48.00, and © Tk.52.00.

Stock price today at $100. A binary PUT with strike of 85 is priced at $0.15....

Stock price today at $100. A binary PUT with strike of 85 is priced at $0.15. What is the implied standard deviation?

Covered Call or Protective Put Suppose that you wish to buy stock and protect yourself against...

Covered Call or Protective Put Suppose that you wish to buy stock and protect yourself against a downside movement in its price. You consider both writing a covered call and buying a protective put. Briefly explain the differences between these two positions. What gains can you achieve from these positions? What are the costs you have to pay to have those gains? What factors would affect your decision?

Assume that you have 100 shares of XYZ stock which has a volatility of 30% and...

Assume that you have 100 shares of XYZ stock which has a volatility of 30% and a current stock price of £60 per share. XYZ pays no dividends. The risk-free interest rate is 3%. 4.1 Use the Black-Scholes option pricing model to value a six-month, at-themoney European put option on XYZ stock with the information as specified above. (10 %) 4.2 Given the information above, what action should you take to hedge using call options and put options, respectively? What...

1.) Assume you purchased 100 shares of Zoomer Corp's stock on margin at the beginning of...

1.) Assume you purchased 100 shares of Zoomer Corp's stock on margin at the beginning of the year for $40 per share. You use $2500 of your own funds and borrow $1500 from the broker. Maintenance Margin requirement is 25%. a) At what price would you receive a margin call (ignore interest)? b) Annual interest cost is 4% on the margin account loan. What is your rate of return on your investment if Zoomer's stock is $44.50 per share after...

Assume you shorted 100 shares of a stock at $37. Commissions are $25 per trade. The...

Assume you shorted 100 shares of a stock at $37. Commissions are $25 per trade. The company also paid a $.50 per share dividend. What is your dollar profit or loss if you close out the position when the stock trades at $34 per share.

A protective collar involves buying an out-of-the-money put and writing an out-of-the-money call on an underlying...

A protective collar involves buying an out-of-the-money put and writing an out-of-the-money call on an underlying asset that you own. Let’s say you own an S&P 500 index security that is currently trading at $30/share. You bought the index at $10 per share so you currently have a big capital gain. You don’t want to sell your shares, but you want to lock in your profits with a protective collar for the next year. You want to make sure you...

Question