An investor who trades heavily in options is long 1,000 shares of PPL stock at $65. Later he writes 10 Dec 75 calls on PPL stock for a premium of 7 and at about the same time purchases 10 Dec 55 puts on PPL stock for a premium of 2. When the stock drops to 45, the calls expire unexercised, and the puts are exercised with the delivery of the stock. What does the investor have for the year on these positions?
Capital loss of $5,000. This is a collar position, which is tested periodically with different numbers — one with the market going up and the call being exercised, and one with the market declining and the put being exercised. Since there is a long put and short call, "marry" them together. See the drawing:
S 75 c +7
L stk -65
L 55 p -2
-60
---75---
+
60BE
-
---55---
45 market, which is below the floor. Stop at 55 for a $5 loss on 1,000 shares
[Module 1, Option Basics, Section 5.9]
Q53524
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Exam Prep: Series 9
The concepts behind this question are explained in-depth in Module 1, Option Basics, Section 5.9.
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