28th November 2010, 11:46 AM
Originally Posted by Paul Yeoh
I sell 100 shares of ABC Co. short at $80. Also, I buy a 70 call option for $5 to protect against the stock price going up.
1. If the stock ends up at $100, what will be my overall gain/loss?
2. If the stock ends up at $50, what will be my overall gain/loss?
3. What is the most I can lose under this short sale-call option plan?
4. If I have an unprotected short sell position (no call option), what is the most I can lose?
5. Under the condition described in part (4), if I had a limit order to buy the stock and close down the position at $60, what is the most I could lose?
Thanks all for leaving me a solution.
Cost =$5 (per share).
1.Overall gain is (-5 + 30 - 20)=5/share. Thus for 100 shares $5 * 100 =$500.
2.Overall gain is (-5 + 0 +30)=25/share. Thus for 100 shares $25 * 100=$2500.
3.Under the current circumstances you can't lose since you get a $5 gift(in terms of your cost) so your minimal gain is $5 per share or total of $500.
5.Since you sold short at $80 IF you can buy back the stock at $60 you would make a $20 gain per share or $2000.