Question

On December 21, 2020, you purchased 100 shares of ABC company at $11 per share. You plan to sell your shares on December 21, 2021 and are concerned about  downside risk. A put option on ABC stock with an exercise price (K) of $40 is currently priced (P) at $2 per share. Also, two call options on ABC stock with exercise prices (K) of $40 and $65 are priced (C) at $2.5 and $1.50 per share, respectively. All options expire on December 21, 2021.  What will be net profit/loss per share on a long collar (use K=$65 call) if the stock price is $90 per share?

	A.	$43.5
	B.	$53.5
	C.	$28.5
	D.	$31.5

Answer 1

Under long collar strategy, a put option is purchased and a call option is sold

Put option is the right to sell the underlying asset at a specified price on a future date.

Call option is the right to buy the underlying asset at a specified price on a future date.

Since the market price at maturity is higher than the strike price, the put option will not be exercised and call option will be exercised and hence, share will have to be sold at strike price of call i.e. $65

Profit = Proceeds from sale – Purchase cost + Premium received – Premium paid

= 65 – 11 + 1.50 – 2

= $53.50

Hence, the answer is B.