Question

1. An investor buys 100 shares of XYZ stock at $30/share and one XYZ 40 put @ $16 to hedge the position. Over eight months, the stock appreciates to $40 per share. The investor is confident that the stock is a good long-term investment with additional upside potential, but is concerned about a near-term weakness in the overall market that could wipe out his unrealized gains. What is the maximum gain for this investor?

1300

unlimited

1400

1700

Answer 1

Maximum Gain to The Investor can be unlimited in nature because he has bought one put option and he has bought 100 shares so if the share starts to go up then there cannot be any upside limit to the stocks going up, and can go up unlimited, and even if he is holding the put option the value of put option can be going to zero, but this stock can go up unlimited so the value of is holding shares will be increasing unlimited so, the overall potential of this strategy for maximum gain will be unlimited.

Correct answer will be option (B) unlimited