1. Suppose you have a short position in a stock, XYZ Corp, and to protect this position, you decide to sell a put option on XYZ. The stock's current price is $50, and the put option you sell has a strike price of $45 and costs the buyer $5. The option will expire in 3 months.

Additional information:

Dividend Payment: XYZ Corp is planning to pay a dividend of $2 per

share in 1.5 months.

Interest Rate Impact: Consider an annual risk-free interest rate of 3%

for the option pricing model.

Volatility Consideration: The annualized volatility of XYZ stock is 20%.

Tax Consideration: Capital gains tax rate is 15%, and it applies to any

profit you make from the short position or the options trade.

Questions

Determine the Profit Equation:I ncorporate the cost of the put option, dividend received (if any), and the impact of the interest rate and volatility on the option's price. Also, account for the tax implications on the overall profit or loss.