You currently hold 100 shares of Citigroup common stock in your taxable brokerage account. You plan to sell your stock simply because you believe that this stock no longer suits the objectives of your portfolio. However, you bought the stock only 10 months ago. In order to pay the capital gains tax rate on your gains rather than the higher ordinary income tax rate, you need to hold the stock for two more months. Unfortunately, this plan exposes your portfolio to the risk that Citigroups stock price might fall (perhaps significantly) before you complete your sale. You would like protection from this risk.

Thus, you plan to implement the protective put strategy. (Hint: see Section D in Lecture 7A.)

Here is the market information when you implement your strategy.

• Currently, the spot market value of Citigroup is $72 per share.
• Put options on Citigroup common stock have 100 shares of stock as the underlying asset.
• Put options that expire in two months with a strike price of K = $72.50 have a premium of $7.10 per share.
• The continuously compounded, annualized risk free rate for this scenario is 2.42%.

Now jump ahead in time to the date when you sell your Citigroup stock and when the put option expires. Suppose that the stock price is 66.44. What is your total profit or loss on this strategy?

NOTE: apply the exact formula or calculation. Do not approximate by treating the risk-free rate as zero.