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Garner Money Management, Inc., is in charge of a $50 million portfolio. Its beta is equal to

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Garner Money Management, Inc., is in charge of a $50 million portfolio. Its beta is equal to the market. To hedge its position, it sells (writes) 200 December 1100 call option contracts on the S&P 500 Stock Index as shown in Table 16–5 on page 426. It also buys 300 December 1100 put option contracts on the same index shown in Table 16–5. Instead of going down, the market goes up by 10 percent (as does the portfolio), and the S&P 500 Stock Index ends at 1,263.00.
Consider the change in the portfolio value and the gains or losses on the call and put options. Each option contract trades in units of 100. What is the overall net gain or loss of Garner Money Management as a result of the changes in the market?
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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A put option is a financial contract that gives the owner the right, but not the obligation, to sell an underlying asset, such as a stock or a commodity, at a predetermined price, known as the strike price, on or before a specific date, known as the expiration date. Put options are used by investors as a form of insurance against a decline in the value of the underlying asset. If an investor expects the value of an asset to fall in the future, they can purchase a put option on that asset. If the value of the asset does fall, the put option will increase in value, allowing the investor to sell the asset at the higher strike price. For example, if an investor owns 100 shares of a stock that is currently trading at $50 per share, they may purchase a put option with a strike price of $45 and an expiration date three months in the future. If the stock price falls to $40 before the expiration date, the investor can exercise the put option and sell their shares for $45 each, even though the market price is only $40. This would allow the investor to limit their losses. It\'s important to note that purchasing a put option involves paying a premium to the seller of the option, and the investor can lose the entire premium if the price of the underlying asset does not decline as expected. Put options are just one type of financial derivative and should only be used by experienced investors who understand the risks involved.

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