Question
Bill Jones inherited 5,000 shares of stock ( note: cost of shares to Bill is $0 ). He does not want to sell the stock
Bill Jones inherited 5,000 shares of stock (note: cost of shares to Bill is $0). 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 _______.
A. $195,000 B. $220,000 C. $175,000 D. $215,000
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