Question

Imagine that you are holding 5,400 shares of stock, currently selling at $45 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 $50 are selling at $4, and January puts with a strike price of $40 are selling at $5. What will be the value of your portfolio in January (net of the proceeds from the options) if the stock price ends up at $32, $45, $52? What will the value of your portfolio be if you simply continued to hold the shares?

stock price

Portfolio Value	$21	$45	$52
if collar is used	$210600	$	$
if you continued to hold the shares	$172,800	$243,000	$280,800

Please find the collar is used for 45 and 52 ??

Answer 1

a. Portfolio Value if Collar is Used at Stock Price of $45

Net Value of positions = Value of Call + Value of Put + Value of Stock

Net Value of positions = $0 + $0 + $45

Net Cost of holding Call Option and Writing Put Option = $5 - $4 = $1

Value of Call is Zero because the investor would not exercise the options at $50 if the Market value of stock price is $45

Value of Put is Zero because the investor would hold share the put option would not exercise the options at $40 if the Market value of stock price is $45

Portfolio Value if Collar is Used at Stock Price of $45 = ($45 - $1) * 5400

Portfolio Value if Collar is Used at Stock Price of $45 = $237600

b. Portfolio Value if Collar is Used at Stock Price of $52

Net Value of positions = Value of Call + Value of Put + Value of Stock

Net Value of positions = -$2 + $0 + $52

Net Cost of holding Call Option and Writing Put Option = $5 - $4 = $1

Value of Call is -$2 because the investor would exercise the options at $50 if the Market value of stock price is $52

Value of Put is Zero because the investor would hold share the put option would not exercise the options at $40 if the Market value of stock price is $52

Portfolio Value if Collar is Used at Stock Price of $52 = ($50 - $1) * 5400

Portfolio Value if Collar is Used at Stock Price of $52 = $264600