Question
Myles Houck holds 800 shares of Lubbock Gas and Light. He bought the stock several years ago at $47.77, and the shares are now trading
Myles Houck holds 800 shares of Lubbock Gas and Light. He bought the stock several years ago at $47.77, and the shares are now trading at $77.50. Myles is concerned that the market is beginning to soften. He doesn't want to sell the stock, but he would like to be able to protect the profit he's made. He decides to hedge his position by buying 8 puts on Lubbock G&L. The 3-month puts carry a strike price of $77.50 and are currently trading at $2.54.
d. Would Myles have been better off using in-the-money puts long dash that is, puts with an $85.50 strike price that are trading at $10.53? How about using out-of-the-money puts say, those with a $71.00 strike price, trading at $0.90? Explain.
Need help answering the following question:
But if the stock price drops to $71.00, Myles would lose $6.50 per share in unprotected capital gains. His profit on the out-of-the-money put hedge would be $____. (Round to the nearest cent.)
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