Question

Tom had a tip that High-Flying Toys was going to have a steep price rise. He is trying to take advantage of the rise to help pay for his son Billy’s first year at college. Two months ago he bought 100 shares at $50.00 per share. The price has since increased to $90.00, but to completely pay for the first semester it has to go to $100 before tuition is due. While he has faith in the stock tip that told him it would break $105.00, Tom is afraid the price might drop in the meantime.

A. How might Tom use options to secure his profits from the rise in the asset price?

Answer 1

Tom pushased 100 shares @ $50 and the price now is 90$ and he want to secure his profit but also want to retain the stock because he expect further upside in the price of stock , to do so he need to buy a at the money put options for 100 shares of high flying toy with strike price of $90 . Put options will give him the right to sell the security at strike price even if price go down and as this is a right not an obligation therefore if price increase as he expects he will make money on stock and the put options will expire worthless with only loss possible is premium paid.