Question

On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on December 21, 2021. What will be net profit/loss per share on a long collar (use K=$65 call) if the stock price is $0 per share? A. $28.5 B. $53.5 C. $58.5 D. $38.5

Answer 1

Long Collar Positions Taken and Initial Payment

1. Buying of $ 11 Share: Initial Payment $ - 11 ( Amount required to Purchase the Share)
2. Sell Call Option of K=$65 call: Initial Payment = $1.50 (Premium receive when Selling an Option)
3. Buy Put Option of f K=$40 put :  Initial Payment = $ - 2 ( Require to pay the premium when buying an option)

So Total Initial Pay = Sum of All Initial payment in each scenario = - 11 + 1.5 - 2 = - 11.5 ( -Sign Denotes Amount require to Pay)

Now at the time of expiry Stock Price becomes Zero :

Payment at Expiry from Each position :

1. Buying of $ 11 Share: Final Payment : 0 ( Stock Price becomes Zero)
2. Sell Call Option of K=$65 call: Final Payment = 0   (Because Option buyer will not exercise the call as the price is below strike price)
3. Buy Put Option of f K=$40 put:  Final Payment = Strike Price - Expiry  Price = 40 - 0 = 40 ( He will exercise his purchased put option as share price fall below the strike price)

So Total Final Pay = Sum of All Final payment in each scenario = 0 + 0 + 40   = 40

Profit from the Strategy = Final Pay + Initial Pay = 40 - 11.5 = $ 28.5

Ans :  net profit/loss per share on a long collar $28.5 (Ans)