Jane Jones, a manager at Computer Science, Inc. (CSI), received 10,000 shares of company stock as part of her compensation package. The stock currently sells at $30 a share. Jane would like to defer selling the stock until the next tax year. In January, however, she will need to sell all her holdings to provide for a down payment on her new house. Jane is worried about the price risk involved in keeping her shares. At current prices, she would receive $300,000 for the stock. If the value of her stock holdings falls below $250,000, her ability to come up with the necessary down payment would be jeopardized. On the other hand, if the stock value rises to $350,000, she would be able to maintain a small cash reserve even after making the down payment. Jane considers two investment strategies:

Strategy A is to write January call options on the CSI shares with strike price $40. These calls are currently selling for $3.00 each. (Covered Call).

Strategy B is to buy January put options on CSI with strike price $35. The put options sell for $3.00 each. (Protective Put)

1. Calculate the P/L for Strategy A when the stock ends up at $20, $25, $35, $40, $45, $50.
   1. Explain what is going on in this strategy (you can write a rule or draw a picture).
2. Calculate the P/L for Strategy B when the stock ends up at $10, $20, $30, $35, $45, $50.
   1. Explain what is going on in this strategy (you can write a rule or draw a picture).
3. Compare the total value of her portfolio and the P/L with and without the hedge for each strategy.
4. Explain which would you strategy you recommend.