Question

A stock is currently trading at a price of $80. You decide to place a collar on this stock. You purchase a put option on the stock, with an exercise price of $75 and a premium of $3.50. You simultaneously sell a call option on the stock with the same maturity and the same premium as the put option. This call option has an exercise price of $90.

Determine the value at expiration and the profit for your strategy under the following

1. The price of the stock at expiration of the options is $92.

2. The price of the stock at expiration of the options is $82.

Answer 1

No. of call option contracts sell or Short =			1		No. of Put options Buy or long =			1
Strike price   =			90		Strike price   =			75
Premium per option			3.5		Premium per otion =			3.5
Total Premium Received			3.5		Total premium paid			3.5
(1) Price of stock at expiration is $92
Value of call option
Call option value at expiration are equal to Stock selling price minus Strike price, if Stock selling price is more than strike price, option shall be exercised by buyer. So it will be cash outflow for seller.
Otherwise value of call option shall be zero.
Stock selling price =		92
Value of call option for buyer = Stock selling price - Strike price
		92 - 90
		2
For seller, Value is -$2 on call option.
Value of put option
Put option value at expiration are equal to Strike price minus market price, if market rate is less than strike price, option shall be exercised.
If spot rate is more than strike price, Option shall not be exercised. So value of put option shall be zero.
Value of Put option =   Strike price - Spot rate (Subject to 0)
	75 - 92
	0
So, value of Put option shall be 0.
Calculation of Net profit or loss from this strategy
Value of call option + Premium received + value of put option - Premium paid
-2 + 3.5 + 0 - 3.5
-2
So, At expiration value of call option is -$2, value of put option is 0 and net loss is -$2.
(1) Price of stock at expiration is $82
Value of call option for buyer = 82 - 90
		$0.00	(it cannot be negative).
So, for seller outflow is 0.
Value of put option 75 - 82 =
		$0.00	(it cannot be negative).
Calculation of Net profit or loss from this strategy
Value of call option + Premium received + value of put option - Premium paid
-0 + 3.5 + 0 - 3.5
$0.00
So, At expiration value of call option is 0, value of put option is 0 and net profit or loss is also 0.