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A trader invests in Facebook by buying 1000 shares in June for $37 per share. She also buys 1000 put options (=10 put option contracts) for $5 each as insurance in cash the stock drops sharply. The put options have a strike price of $37 and an expiration date December.
a) What is the profit or loss of the portfolio if the spot price on December is $30 and the portfolio consists of stock and option positions?
b) What is the profit or loss of the portfolio if the spot price on December is $37 and the portfolio consists of stock and option positions?
c) What is the profit or loss of the portfolio if the spot price on December is $42 and the portfolio consists of stock and option positions?
d) What is the profit or loss of the portfolio if the spot price on December is $47 and the portfolio consists of stock and option positions?
e) suppose the investor in June is considering whether to buy the stocks only or buy the put options only. How low does the stock price have to drop for the option strategy to be more profitable? Assume that the option is not exercised before December and the stock is only sold in December. Ignore time value of money.
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