Myles Houck holds 700 shares of Lubbock Gas and Light. He bought the stock several years...

50.1K

Verified Solution

Question

Finance

Myles Houck holds 700 shares of Lubbock Gas and Light. He boughtthe stock several years ago at 47.49, and the shares are nowtrading at $75.00 Myles is concerned that the market is beginningto soften. He doesn't want to sell the stock, but he would like tobe able to protect the profit he's made. He decides to hedge hisposition by buying 7 puts on Lubbock G&L. The 3-month putscarry a strike price of $75.00 and are currently trading at2.74.
a. How much profit or loss will Myles make onthis deal if the price of Lubbock G&L does indeed drop, to$61.00 a share, by the expiration date on the puts?
b. How would he do if the stock kept going upin price and reached $ 90.00 a share by the expiration date?
c. What do you see as the major advantages ofusing puts as hedge vehicles?
d. Would Myles have been better off usingin-the-money puts that is, puts with an $ 85.00 strike price thatare trading at $ 10.53? How about using out-of-the-moneyputs say,those with a $ 70.00 strike price, trading at $ 0.90? Explain.
a. If the price of Lubbock G&L does indeeddrop, to $ 61.00 a share, by the expiration date on the puts, Myleswill have a profit (or loss) of _ (Round to the nearestcent.)
b. If the stock kept going up in price andreached $ 90.00 a share by the expiration date, he would have aprofit (or loss) of (Round to the nearest cent.)
c. What do you see as the major advantages ofusing puts as hedge vehicles? Decide whether the statement below istrue or false:
The major advantage of a put hedge is that it allows investorsto enjoy the upward profit potential, while at the same timeprotecting the profits already made on the long transaction. In theworst case, the put hedge would only result in the loss of the costof the put.
Is the statement above true or false?
True
d. Would Myles have been better off usingin-the-money puts that is, puts with an $ 85.00 strike price thatare trading at $ 10.53? How about using out-of-the-moneyputs say,those with a $ 70.00 strike price, trading at $ 0.90? Explain.
Please Help, Thank you!

Answer & Explanation Solved by verified expert

3.7 Ratings (472 Votes)

One put contract has 100 shares a Strike price 75 share price 61 at expiry Profit 7561 14 per share Total profit 14700 9800 Option cost option pricenumber of shares 274700 1918 Net profit total See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Myles Houck holds 700 shares of Lubbock Gas and Light. He boughtthe stock several years ago at 47.49, and the shares are nowtrading at $75.00 Myles is concerned that the market is beginningto soften. He doesn't want to sell the stock, but he would like tobe able to protect the profit he's made. He decides to hedge hisposition by buying 7 puts on Lubbock G&L. The 3-month putscarry a strike price of $75.00 and are currently trading at2.74.a. How much profit or loss will Myles make onthis deal if the price of Lubbock G&L does indeed drop, to$61.00 a share, by the expiration date on the puts?b. How would he do if the stock kept going upin price and reached $ 90.00 a share by the expiration date?c. What do you see as the major advantages ofusing puts as hedge vehicles?d. Would Myles have been better off usingin-the-money puts that is, puts with an $ 85.00 strike price thatare trading at $ 10.53? How about using out-of-the-moneyputs say,those with a $ 70.00 strike price, trading at $ 0.90? Explain.a. If the price of Lubbock G&L does indeeddrop, to $ 61.00 a share, by the expiration date on the puts, Myleswill have a profit (or loss) of _______ (Round to the nearestcent.)b. If the stock kept going up in price andreached $ 90.00 a share by the expiration date, he would have aprofit (or loss) of ______ (Round to the nearest cent.)c. What do you see as the major advantages ofusing puts as hedge vehicles? Decide whether the statement below istrue or false:The major advantage of a put hedge is that it allows investorsto enjoy the upward profit potential, while at the same timeprotecting the profits already made on the long transaction. In theworst case, the put hedge would only result in the loss of the costof the put.Is the statement above true or false?Trued. Would Myles have been better off usingin-the-money puts that is, puts with an $ 85.00 strike price thatare trading at $ 10.53? How about using out-of-the-moneyputs say,those with a $ 70.00 strike price, trading at $ 0.90? Explain.Please Help, Thank you!