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Question 1. Tesla stock (TSLA) is currently trading at $1200. You think it is overvalued and decide to short the stock. You're worried, however,
Question 1. Tesla stock (TSLA) is currently trading at $1200. You think it is overvalued and decide to short the stock. You're worried, however, that if the stock instead keeps going up, you could owe an arbitrarily large amount of money on this short position. (a) If you want to keep the short position but cap your possible losses at at most $300 a year from now, what option(s) should you add to your portfolio? 1 (b) Suppose instead that your broker will not sell you a short position in the stock, and is only offering (long or short) call options on the stock. Construct a portfolio whose payout is positive if and only if one year from now the stock price has dropped to between $600 and $800. (c) Now suppose your broker is only offering put options. Construct a portfolio with the same payout as that in (b).
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