Myles Houck holds 500 shares of Lubbock Gas and Light. He bought the stock several years ago at $ 47.16, and the shares are now trading at $ 77.50. Myles is concerned that the market is beginning to soften. Hedoesn't want to sell thestock, but he would like to be able to protect the profithe's made. He decides to hedge his position by buying 5 puts on LubbockG&L. The3-month puts carry a strike price of $ 77.50 and are currently trading at $ 2.51.

a.How much profit or loss will Myles make on this deal if the price of LubbockG&L does indeeddrop, to $ 60.50 ashare, by the expiration date on theputs?

b.How would he do if the stock kept going up in price and reached $ 91.00 a share by the expirationdate?

c.What do you see as the major advantages of using puts as hedgevehicles?

d.Would Myles have been better off usingin-the-money puts-that is, puts with an $ 86.50 strike price that are trading at $ 10.55? How about usingout-of-the-money putssay, those with a $ 70.50 strikeprice, trading at $ 0.90? Explain.