Question

XYZ share price is currently $20. You are considering two possible investment strategies to profit from a predicted fall in XYZ share price: (i) short sell 60 shares at the spot price, or (ii) enter a long put option (quoted at $1) which allows you to sell 100 shares at a strike price of $18.

Calculate the share price at which the two strategies generate the same net profit.

Select one:

Impossible to determine without further information

$18.50

$15.00

$12.50

Answer 1

Let the share price be 'x' in which both the strategies will give same profit.

Startegy 1:

We go spot shorting at $20.

Current cover price for short =x

Profit = (20-x)

Lot size 60qty given

Total profiy = (20-x) *60.

Now Strategy 2

We go long put of $1 premium for 100 lot size.

Strike price is 18

Profit = (18-x)*100 lot size - 100 the premium

To be indifferent we equate the equations,

(18-x)*100 -100 = (20-x)*60

Solving for x ,

40x= 500

X= 500/40 = $12.50 answer.

Kindly Upvote and Like! Its very essential for us. Please :)