. You purchase one IBM July 250 call contract for a premium of $4 (note that...
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. You purchase one IBM July 250 call contract for a premium of $4 (note that July 90 means contract expires in July and has a strike price of $250; one contract is for 100 shares). The stock has a 2 for 1 split prior to the expiration date. You hold the option until the expiration date when IBM stock sells for $128 per share. You will realize a on the investment. Bill Jones inherited 5,000 shares of stock (note: cost of shares to Bill is S0). He does not want to sell the stock this year due to tax reasons, but he is concerned the stock will drop in value before year end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. A collar is created by buying the underlying stock, buying a put with lower strike price and writing a call with a higher strike price. January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 strike price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is . You purchase one IBM July 250 call contract for a premium of $4 (note that July 90 means contract expires in July and has a strike price of $250; one contract is for 100 shares). The stock has a 2 for 1 split prior to the expiration date. You hold the option until the expiration date when IBM stock sells for $128 per share. You will realize a on the investment. Bill Jones inherited 5,000 shares of stock (note: cost of shares to Bill is S0). He does not want to sell the stock this year due to tax reasons, but he is concerned the stock will drop in value before year end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. A collar is created by buying the underlying stock, buying a put with lower strike price and writing a call with a higher strike price. January call options with a strike of $50 are quoted at a cost of $2 and January puts with a $40 strike price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is
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To establish a collar Bill needs to buy the underlying stock buy a put option with a lower strike pr... View the full answer
Related Book For
Intermediate Accounting Volume 2
ISBN: 9781119497042
12th Canadian Edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy
Posted Date:
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